Interpretation Regarding Use of Electronic Media by Commodity Pool Operators and Commodity Trading Advisors
Federal RegisterAug 14, 1996
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COMMODITY FUTURES TRADING COMMISSION
17 CFR Part 4
Interpretation Regarding Use of Electronic Media by Commodity
Pool Operators and Commodity Trading Advisors
AGENCY: Commodity Futures Trading Commission.
ACTION: Interpretation; Solicitation of comment.
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SUMMARY: The Commodity Futures Trading Commission (the ``Commission''
or ``CFTC'') is publishing its views with respect to the use of
electronic media for transmission and delivery of Disclosure Documents,
[[Page 42147]]
reports and other information by commodity pool operators (``CPOs''),
commodity trading advisors (``CTAs''), and associated persons (``APs'')
thereof, under the Commodity Exchange Act and the Commission's rules
promulgated thereunder. This interpretative guidance is intended to
assist CPOs, CTAs and their respective APs in using electronic media to
comply with their disclosure and reporting obligations, and to
encourage continued research, development and use of electronic media
for such purposes. The Commission also is announcing a pilot program
for the electronic filing of CPO and CTA Disclosure Documents with the
Commission. The Commission seeks comment on the issues discussed in
this release and any related issues, including other areas as to which
the Commission could provide guidance concerning use of electronic
media for filing with the Commission or delivery to customers of
required reports.
DATES: This interpretation is effective on October 15, 1996. Comments
should be received on or before October 15, 1996.
ADDRESSES: Comments should be submitted to Jean A. Webb, Secretary of
the Commission, Commodity Futures Trading Commission, 1155 21st Street,
N.W., Washington, D.C. 20581. In addition, comments may be sent by
facsimile transmission to facsimile number (202) 418-5521, or by
electronic mail to [email protected].
FOR FURTHER INFORMATION CONTACT: Susan C. Ervin, Deputy Director/Chief
Counsel, Gary L. Goldsholle, Attorney/Advisor, Christopher W. Cummings,
Attorney/Advisor, or Tina Paraskevas Shea, Attorney/Advisor, Division
of Trading and Markets, Commodity Futures Trading Commission, 1155 21st
Street, N.W., Washington D.C. 20581. Telephone number: (202) 418-5450.
Facsimile number: (202) 418-5536. Electronic mail: [email protected]
SUPPLEMENTARY INFORMATION:
I. Background
By this release, the Commission is publishing its views with
respect to the use of electronic 1 media by CPOs, CTAs and their
respective APs,2 for transmission and delivery of Disclosure
Documents, reports and other information in a manner consistent with
the Commodity Exchange Act (the ``CEA'' or ``Act'') 3 and the
Commission's regulations promulgated thereunder.4
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\1\ For purposes of this release, the term ``electronic'' media
refers to media such as audiotapes, videotapes, facsimiles, CD-ROM,
electronic mail, bulletin boards, Internet World Wide Web sites and
computer networks (e.g., local area networks and commercial on-line
services) used to provide documents and information required by or
otherwise affected by the Commodity Exchange Act and the regulations
promulgated thereunder.
\2\ The Commission is not addressing the use of electronic media
by other Commission registrants, such as futures commission
merchants (``FCMs'') and introducing brokers (``IBs'') at this time
but has such issues under review.
\3\ 7 U.S.C. 1 et seq. (1994).
\4\ Commission rules are found at 17 CFR Ch. I (1996). The rules
governing the obligations of CPOs and CTAs, including rules relating
to disclosure and reporting, recordkeeping and advertising, are
found at 17 CFR Part 4 (1996).
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The Expanding Electronic Marketplace. In recent years, personal
computers have gained widespread entry into the mass market.5
Advances in personal computers and related electronic media technology
have enabled large sectors of the general population to use computers
to access the Internet, proprietary on-line services, and multi-media
applications such as those stored on CD-ROMs. The use of personal
computers to access the Internet and proprietary on-line services has
been growing at a spectacular rate.6 This trend appears likely to
continue or even accelerate.7
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\5\ Current estimates are that between thirty-five and thirty-
nine percent of households in the United States possess a computer.
G. Christian Hill, ``Tally of Homes With PCs Increased 16% Last
Year,'' Wall Street Journal, May 21, 1996, at B10; ``Too Good to
Last,'' Economist, March 23, 1996, at 62.
\6\ The actual number of Internet users in the United States
above age 16 is the focus of debate and has been estimated between
16.4 and 22.0 million, as of August 1995. Peter H. Lewis, ``New
Estimates in Old Debate on Internet Use,'' New York Times, April 17,
1996, at D1.
\7\ Daniel Akst, ``Postcard from Cyberspace: Proof of
Skyrocketing Net Growth,'' Los Angeles Times, February 28, 1996, at
D4. The trend towards Internet usage appears to be so strong that
certain participants in the computer industry are developing
``network computers,'' low cost computers whose primary purpose will
be to connect to the Internet. Don Clark, ``Oracle Chief to Unveil:
`Info Appliances,' But Will Consumers Want to Buy Them?'' Wall
Street Journal, May 16, 1996, at B1.
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The growing use of electronic media is significantly affecting the
financial services industry. Specifically, it has caused many changes
in the way industry participants gather, store, and communicate
information. Electronic media enable private investors as well as
market professionals to enjoy ready access to ``real-time'' trade data
and financial news. Similarly, industry professionals and private
investors can now quickly perform complex analyses of trade and market
data. Both private investors and market professionals use electronic
mail and message boards to communicate and disseminate information.
Within the financial services industry, a wide range of businesses,
both large and small, have established a presence on the World Wide Web
and on the Internet. For instance, many securities brokerage houses now
allow customers to place trades and to review account information over
the Internet.8 Many mutual fund companies have established sites
on the World Wide Web or on proprietary on-line services. These sites
allow potential investors to download prospectuses, transfer
investments among multiple mutual funds, and complete subscription
applications without having to wait for such materials to arrive by
postal mail.9
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\8\ Estimates of the number of on-line brokerage accounts
indicate rapid growth. According to one source, there were 412,000
on-line accounts in 1994, and the number is expected to surpass 1.3
million by 1998. Greg Miller and Tom Petruno, ``For Investors, the
Internet has Promise, Perils,'' Los Angeles Times, June 4, 1996, at
A1, A6.
\9\ ``Mutual Funds in Cyberspace,'' The Investment Lawyer, Vol.
2, No. 10, November 1995.
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The futures industry has similarly been affected by developments in
electronic media. Many CTAs (including publishers of market
newsletters), CPOs, FCMs and IBs have established a presence on the
Internet, generally by operating or otherwise being listed on the World
Wide Web. Use of the World Wide Web and the Internet appears to be an
increasingly important component of the business strategies of futures
professionals. For the most part, these registrants currently are using
electronic media to supplement their traditional paper-based
activities. However, many registrants have expressed strong interest in
using electronic media to comply with various requirements of the Act
and Commission regulations. In particular, registrants have indicated
that they are interested in electronically providing Disclosure
Documents, obtaining acknowledgments of receipt of Disclosure
Documents, compiling indices of CTA and CPO performance and Disclosure
Documents, and filing Disclosure Documents and other materials with the
Commission. The rapid technological advances in computers and growth of
electronic media have brought the regulatory issues raised by these
developments to the forefront of the Commission's agenda.10
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\10\ As Acting Chairman John E. Tull noted in March 14, 1996, in
testimony before the Subcommittee on Agriculture, Rural Development,
Food and Drug Administration and Related Agencies of the House
Committee on Appropriations:
The Commission is actively working to address market
participants' interest in using new technologies to increase their
efficiency and competitiveness. These efforts include: consulting
with industry representatives concerning current and prospective
uses of the Internet for communicating with the public and with
other futures professionals; creating a program for monitoring
solicitation activity on the Internet; and developing mechanisms for
electronic filing of reports and other ways to facilitate innovative
uses of computer technology in a manner consistent with customer
protection.
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Electronic media, most dramatically the Internet and the World Wide
Web, present regulators with a complex of issues that differ
significantly from those presented by traditional paper-based or
telephonic activities. The Internet allows users to reach millions of
people at very low cost, permitting real-time, simultaneous
communication by large numbers of persons, with varying degrees of
anonymity. Communications over the Internet can combine text, audio and
video. Another unique characteristic of the Internet is that
information posted thereon can be updated or changed instantaneously,
and Internet sites can be created and eliminated virtually at will. The
Internet also is geographically unconstrained; a party using the
Internet can be located anywhere, even internationally.11 As the
Internet's popularity has grown, so too has the volume of information
that can be readily accessed via so-called ``search engines.'' Finally,
Internet sites can be connected to other sites through hyperlinks,
which enable users to move readily from place to place within a website
or to a new website.
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\11\ The Commission recognizes that the worldwide availability
of material placed on the Internet presents important issues
concerning the scope of the regulatory and enforcement jurisdiction
of individual nations. For example, solicitation materials posted on
the Internet by CPOs and CTAs registered with the Commission and
acting in compliance with Commission rules may be accessed by
persons in foreign jurisdictions under whose laws such a
solicitation may not be lawful. The International Organization of
Securities Commissions (``IOSCO''), an international association of
securities and futures regulatory and self-regulatory organizations,
has several initiatives underway to address these issues. In
particular, IOSCO is examining a number of issues, including the
enforcement and other regulatory challenges for securities and
futures regulators presented by the increasing use of public
computer networks. The Commission invites comment from interested
persons as to how the issues created by application of multiple
jurisdictions' laws to an international mode of communication such
as the Internet should be resolved.
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A number of federal agencies, including the Securities and Exchange
Commission (``SEC''), have begun to formally address regulatory issues
presented by activities involving the Internet. In October 1995, the
SEC issued an interpretative release addressing electronic delivery of
documents such as prospectuses, annual reports to shareholders, and
proxy solicitation materials by issuers, third parties (such as persons
making tender offers or soliciting proxies) and persons acting on their
behalf. In that release, the SEC set forth its views on the
requirements and standards to be met by securities issuers and mutual
funds using electronic media to deliver such documents to persons who
consent to such delivery.12 In a subsequent release dated May 15,
1996, the SEC extended its guidance with respect to electronic media to
broker-dealers, transfer agents, investment advisers and persons acting
on their behalf.13 In these releases, the SEC articulated its view
that in most instances, ``the use of electronic media should be at
least an equal alternative to the use of paper-based media.'' 14
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\12\ 60 FR 53458 (October 13, 1995). In a companion release, the
SEC proposed technical revisions to certain of its rules in light of
the interpretations proffered in the interpretative release. 60 FR
53468 (October 13, 1995). Much of the guidance provided in the SEC
interpretative release took the form of fifty-one examples of
particular uses of electronic media by securities professionals.
\13\ 61 FR 24644 (May 15, 1996).
\14\ 60 FR at 53459. On January 7, 1996, the North American
Securities Administrators Association, Inc. adopted a resolution
concerning offerings of securities over the Internet. In general,
this resolution encouraged states to exempt certain offerings over
the Internet from registration provisions and to take appropriate
steps to allow such offers and sales to occur subject to specified
conditions.
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In addition, the SEC has indicated that, subject to certain
conditions, Spring Street Brewing Co. (``Spring Street'') may operate
Wit-Trade, an on-line bulletin board-based trading system on the World
Wide Web that allows individuals to buy and sell shares of Spring
Street stock over the Internet. Spring Street had voluntarily suspended
trading on Wit-Trade on March 20, 1996, apparently due to concern that
the system, as then structured, did not satisfy SEC
requirements.15 However, in a March 22, 1996, letter to Spring
Street, the SEC's Divisions of Corporation Finance and Market
Regulation expressed support for securities market innovations such as
Wit-Trade, which they described as ``an innovative mechanism that has
the potential to provide [Spring Street] shareholders with greater
liquidity in their investments.'' 16 However, to ensure protection
of public investors, the SEC also imposed several conditions upon Wit-
Trade's resumption of trading. In order to continue its on-line trading
system, Wit-Trade, which is not a registered broker-dealer, was
required to use an independent agent to handle investor funds, to
supplement the information provided about Spring Street on the World
Wide Web in order to highlight the risks inherent in investing in
illiquid and speculative securities and to provide on the website a
transaction history, including price and volume data, to facilitate
informed investment decisions. Finally, the SEC stated that Spring
Street was required to maintain and deliver an offering circular in
accordance with Regulation A.17
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\15\ See Rob Wells, ``SEC Allows Brewer to Trade Stock on
Internet,'' Washington Times, March 26, 1996, at 5B. The developer
of Spring Street Brewing Co. has created Wit Capital Corporation to
act as agent in the public offering of securities through the
Internet and to create an electronic marketplace for the shares of
such companies. ``Brewer That Began IPOs on Web Plans On-Line
Exchange,'' The Washington Post, April 3, 1996, at G1.
\16\ Spring Street Brewing Co., SEC No-Action Letter, [Current
Transfer Binder] Fed. Sec. L. Rep. (CCH) para. 77,201 (April 17,
1996).
\17\ 17 CFR 230.251 et seq. (1996). Regulation A is an exemption
from registration available to issuers that are neither Securities
Exchange Act of 1934 reporting companies or investment companies and
permits interstate offerings of up to $5 million during any twelve
month period, including up to $1.5 million in non-issuer resales. An
offering pursuant to Regulation A requires that the issuer file an
``offering circular'' with the SEC.
The SEC also noted that its regulatory authority over Wit-Trade
extends to some categories of Wit-Trade's users. Specifically, the
SEC cautioned that Spring Street should inform users of the system
that if they post quotations simultaneously on both the Buyer and
Seller Bulletin Boards, they may be considered a ``dealer'' and
required to register as such and comply with the requirements
applicable to broker-dealers under the federal securities laws. The
SEC also stated that any transactions facilitated through Wit-Trade
would be subject to the antifraud provisions of the federal
securities laws.
Further, by letter dated June 21, 1996, the SEC's Divisions of
Market Regulation, Investment Management and Corporation Finance
granted approval to Real Goods Trading Corp. (``RGTC''), permitting
it to operate a bulletin board system on the World Wide Web whereby
persons may post notices regarding purchases or sales of RGTC stock
in light of representations that, inter alia, RGTC will not receive
any compensation for creating or maintaining the system and that it
will not receive, transfer or hold any funds or securities in
connection with its operation of the system. Real Goods Trading
Corp., 1996 SEC No-Act. Lexis 566 (June 24, 1996); Jeffrey Taylor,
``SEC to Allow Firm to Run Market For Its Own Shares on the
Internet,'' Wall Street Journal, June 27, 1996, at B12.
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Regulatory programs to address new commercial uses of the Internet
and World Wide Web have been accompanied by law enforcement actions to
address apparent abuses involving the use of such media. The Federal
Trade Commission (``FTC'') has brought several enforcement actions
involving fraud on the Internet. On May 29, 1996, the FTC announced
that it had obtained a federal court order against Fortuna Alliance,
L.L.C., temporarily halting an alleged pyramid scheme advertised over
the Internet that had taken in over $6 million.18 On June 12,
1996, the FTC obtained a preliminary injunction, keeping in effect the
identical provisions of the temporary restraining order. The FTC has
also established an electronic forum
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intended to develop a set of voluntary principles applicable to the use
of consumer information in electronic media generally.19 This
electronic forum is presently soliciting comment from all sources,
including consumers, industry representatives, and privacy advocates.
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\18\ FTC v. Fortuna Alliance, L.L.C., Civ. Docket 96-CV-799,
W.D. Wa. 1996.
\19\ See FTC's website at http://www.ftc.gov/ftc/privacy.htm.
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NASD Regulation, Inc. (``NASDR''), the self-regulatory organization
responsible for oversight of securities firms and professionals and
over-the-counter securities trading, recently issued a Notice to
Members addressing supervisory and other obligations related to the use
of electronic media.20 In that notice, NASDR explained that
electronic communications are subject to the same approval,
recordkeeping, and filing requirements as communications by other means
and emphasized that all communications by its members with the public
remain subject to the antifraud provisions of the federal securities
laws. Further, it explained that members must comply with the NASD's
suitability rule, disclose material adverse facts to customers, and
implement appropriate supervisory procedures to ensure that their
associated persons do not misuse electronic communications or engage in
misconduct while on-line. NASDR also solicited comment from members
concerning their use of electronic media and whether there is a need
for ``prophylactic regulatory measures.'' 21
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\20\ NASD Notice to Members 96-50, July 1996. In a previous
notice, NASDR provided guidance to its members concerning the
regulatory implications of certain conduct occurring over various
electronic media, including the World Wide Web, ``bulletin boards,''
electronic mail, ``chat rooms,'' and hyperlinked sites. ``Ask the
Analyst About Electronic Communications,'' NASD Regulatory &
Compliance Alert, April 1996.
\21\ NASD Notice to Members 96-50, July 1996.
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Regulatory Implications of New Electronic Media. Like its sister
agencies, the CFTC has been alert to the potential regulatory and law
enforcement implications of the Internet and electronic media
generally. For example, like businesses and other government agencies,
the Commission is using electronic media to increase public awareness
of and access to its services. The Commission initiated its website on
the World Wide Web on October 10, 1995. The Commission now regularly
provides information on its website concerning a broad range of topics,
including enforcement actions, opinions and orders, commitments of
traders reports, interpretative letters, press releases, sanctions in
effect and reparations proceedings (including the necessary forms to
institute reparations claims).22
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\22\ The address of the site is http://www.cftc.gov. It is
visited by thousands of users each month.
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In addition to its World Wide Web site, the Commission has
undertaken a variety of initiatives relating to the application of
technology and electronic media to regulated futures activities. The
Commission recently concluded five market automation briefings,
soliciting input from four exchanges and from the brokerage community,
through representatives of the Futures Industry Association.23 In
these briefings, the exchanges described the current status and planned
improvements to clearing, order-routing, trade tracking, surveillance
and automation systems. The brokerage representatives identified
technological enhancements, including electronic transaction
confirmations and recordkeeping capacity, relevant to the continuing
efficiency and competitiveness of United States futures markets.
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\23\ Advisory No. 25-96 (May 13, 1996); ``Market Automation
Examined,'' [Current Transfer Binder] Comm. Fut. L. Rep. (CCH)
Report Letter No. 528 at 5 (June 7, 1996).
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To date, the Commission has facilitated the use of electronic media
by providing relief from or interpretations of regulatory requirements
in a variety of contexts. Recently, the Division of Trading and Markets
issued a ``no-action'' letter and a related advisory allowing FCMs to
use facsimile transmissions to send daily confirmation statements to
certain institutional customers in fulfillment of their obligations
under Commission Rule 1.33(b).24 The Division of Trading and
Markets also has issued an advisory concerning the attestation of
financial reports filed electronically with a self-regulatory
organization.25 Pursuant to Advisory 28-96, FCMs and IBs who file
financial reports electronically with a self-regulatory organization
that operates a program for electronic filing approved by the
Commission, such as the Chicago Board of Trade (``CBT'') or the Chicago
Mercantile Exchange (``CME''), may use a personal identification number
(``PIN'') in lieu of a signature, which will be deemed to be the
equivalent of a manual signature for purposes of attestation under
Commission Rule 1.10(d)(4).26 The PIN, therefore, will constitute
a representation by the user that the information contained in the
financial report is true, correct and complete. The Division of Trading
and Markets also is encouraging the CME and the CBT to license the
electronic filing system developed jointly by these exchanges, and
currently used by their members to file financial reports
electronically, at reasonable cost to other markets and is evaluating
whether to require electronic filing for all but certified financial
statements. The Division of Trading and Markets also has encouraged the
use of electronic media to achieve greater efficiency by allowing firms
to directly enter certain registration filings in connection with the
National Futures Association (``NFA'') direct entry program.27
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\24\ Advisory No. 22-96, [Current Transfer Binder] Comm. Fut. L.
Rep. (CCH) para. 26,679 (May 2, 1996). Throughout this
Interpretation the Commission refers to various staff interpretative
letters and advisories. These letters and advisories represent
interpretations by the Commission's staff and do not necessarily
represent interpretations by the Commission. The Commission intends
to issue a separate Federal Register release addressing electronic
communications and disclosures by FCMs and IBs. Prior to the
issuance of such a release, the Commission's Division of Trading and
Markets will continue to resolve issues in this area on a case-by-
case basis.
\25\ Advisory No. 28-96, [Current Transfer Binder] Comm. Fut. L.
Rep. (CCH) para. 26,711 (May 28, 1996).
\26\ The Commission approved rules of the CME and CBT permitting
electronic filing of financial reports prior to issuing this
advisory. See CME Rule 970 (approved by the Commission on September
27, 1993); CBT Capital Rule 311, Appendix 4B (approved by the
Commission on September 21, 1993). The Commission expects to propose
its own rules on this subject in the near future.
\27\ 57 FR 60799 (December 22, 1992).
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The Commission's Division of Enforcement (``DOE'') is actively
monitoring activity on the Internet and proprietary on-line services.
The DOE investigates and prosecutes violations of the CEA by persons
who use electronic media, as well as any other media, to accomplish
such violations. For instance, the Commission recently brought an
action in the United States District Court for the Southern District of
Florida against certain persons alleging fraud in connection with the
solicitation and receipt of funds for the purchase and use of computer-
generated trading systems.28 The complaint alleges that the
defendants in that case marketed the systems in national newspapers and
on the Prodigy on-line service Money Talk Bulletin Board. On October
16, 1995, the District Court issued an ex parte order freezing
defendants' assets. On October 25, 1995, the defendants, without
admitting or denying the allegations, consented to the entry of an
Order of Preliminary Injunction which, among other things, prohibited
them from acting as CTAs without benefit of registration.
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\28\ CFTC v. Maseri, et al., Case No. 95-6970-Civ-Davis (S.D.
Fla. 1995).
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In addition, the DOE will shortly introduce a section of the
Commission's website through which members of the public can provide it
with information regarding possible violations of the CEA
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occurring on the Internet or elsewhere. This section will be an
important part of the DOE's and the Commission's surveillance and
information gathering activities over the Internet.
The Commission's Office of Information Resources Management
(``OIRM'') performs ongoing assessments of the opportunities offered by
the use of new technology to streamline or otherwise improve the
effectiveness of the Commission's programs. For example, in addition to
implementing and maintaining the Commission's website, OIRM has
recently provided a firewall-protected connection between the
Commission's internal network and the Internet. This connection
provides all Commission staff with Internet electronic mail addresses,
thereby enabling them to receive industry inquiries electronically and
to respond to such inquiries more rapidly. It also provides select
Commission staff with full web-browsing capabilities to facilitate
surveillance and other information gathering activities.
In sum, the Commission supports the use of new technologies to
enhance efficiency and competitiveness and believes that electronic
media can provide an effective alternative to traditional paper-based
media. The Commission encourages industry participants to consult with
the Commission as they develop and refine electronic media applications
in order to assure that transitions to electronic media occur
efficiently and without loss of regulatory protections.
The Commission is issuing this release to provide guidance
concerning a range of issues presented by existing and contemplated
uses of electronic media by the managed futures industry. The release
addresses: the applicability of the CEA and Commission regulations to
the use of electronic media, including registration duties and other
regulatory requirements applicable to persons who use electronic media
to provide commodity trading advice or to solicit managed futures
accounts or pool participations; the criteria and requirements
applicable to CPOs and CTAs seeking to use electronic media for the
delivery of Disclosure Documents, reports and other information; and a
mechanism whereby CPOs and CTAs may use electronic media to file
Disclosure Documents with the Commission. The Commission invites
comment on each of these topics, and any related issues of interest to
futures professionals or other market users.
II. Applicability of the Commodity Exchange Act and Regulations
Thereunder to Use of Electronic Media: Registration and Other
Requirements for Commodity Trading Advisors and Commodity Pool
Operators
The advent of electronic media, such as the Internet, as common
modes of commercial communication has given rise to numerous questions
concerning the applicability of existing regulatory structures to these
media. Although this release is principally directed toward the use of
electronic media by managed futures professionals, the Commission also
wishes to emphasize that, as a general matter, the nature and effect of
a person's conduct, not the medium of communication chosen, determine
the applicability of the Commission's regulatory framework.
Consequently, persons using electronic media are subject to the same
statutory and regulatory requirements under the Commission's regulatory
framework as persons employing other modes of communication.
This conclusion follows from the breadth of the mandates codified
in the CEA, as well as their express terms. The definition of CPO, for
example, includes ``any person engaged in a business that is of the
nature of an investment trust, syndicate, or similar form of
enterprise, and who, in connection therewith, solicits, accepts or
receives from others funds, securities or property, either directly or
through capital contributions, the sale of stock or other forms of
securities, or otherwise, for the purpose of trading in any commodity
for future delivery on or subject to the rules of any contract market *
* *.'' 29 Similarly, the CTA definition includes ``any person who
* * * for compensation or profit, engages in the business of advising
others, either directly or through publications, writings or electronic
media, as to the value of or the advisability of trading in any
contract of sale of a commodity for future delivery made or to be made
on or subject to the rules of a contract market * * *.'' 30
Section 4l of the Act confirms the national public interest in the
activities of CTAs and CPOs whose advice to and arrangements with
clients ``take place and are negotiated and performed by the use of the
mails and other means and instrumentalities of interstate commerce.''
31 More generally, Section 18 of the Act directs the Commission to
establish and maintain, ``as part of its ongoing operations,'' research
and information programs to determine, inter alia, ``the feasibility of
trading by computer, and the expanded use of modern information system
technology, electronic data processing, and modern communication
systems by commodity exchanges, boards of trade, and by the Commission
itself for purposes of improving, strengthening, facilitating, or
regulating futures trading operations.'' 32
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\29\ 7 U.S.C. 1a(4) (emphasis added).
\30\ 7 U.S.C. 1a(5)(A) (emphasis added). The definition of the
term ``commodity trading advisor'' was amended by the Futures
Trading Act of 1982, Pub. L. No. 97-444, 96 Stat. 2204 in order to
refer expressly to ``electronic media.'' Similarly, the exclusions
from the CTA definition for newspaper reporters and publishers were
amended to add ``electronic media'' to the exclusion for print
media.
\31\ 7 U.S.C. 6l (emphasis added).
\32\ 7 U.S.C. 22 (emphasis added).
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However, although Congress's intent that the Act should encompass
and accommodate new technologies is clear, market participants may
nevertheless benefit from guidance as to the manner in which the Act
and Commission rules apply in specific contexts. This release is
intended to facilitate the use of electronic information and
communications systems by Commission registrants in conducting their
businesses and in making required filings with the Commission. In
particular, this release is intended to facilitate the use of
electronic communication systems by clarifying the manner in which
Commission rules, generally written to address either oral or hardcopy
written communications, may be translated into the context of
electronic media.
As a threshold matter, the Commission wishes to emphasize the
registration duties of persons using electronic media to engage in
activity subject to the Act and Commission regulations. The Act's
registration requirements for commodity professionals are a cornerstone
of the regulatory framework enacted by Congress. Determinations as to
whether a person must register, and in what capacity, require an
evaluation of all of the ``circumstances surrounding such person's
commodity-related activities.'' 33 Section 4m(1) of the Act makes
it unlawful for any CTA or CPO, unless excluded or exempted from
registration, ``to make use of the mails or any instrumentality of
interstate commerce in connection with his business as such commodity
trading advisor or commodity pool operator'' 34 without being
registered under the Act. Thus, the Act requires the registration of
persons who use any instrumentality of interstate commerce, including
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electronic media, in connection with their business as a CTA or CPO.
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\33\ 48 FR 35248, 35253 n.27 (August 3, 1983).
\34\ 7 U.S.C. 6m(1).
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A. Commodity Trading Advisory Activities
1. Trading Advice Communicated Electronically
The Act defines the term ``commodity trading advisor'' to include,
subject to specified exclusions, any person who: ``(i) for compensation
or profit, engages in the business of advising others, either directly
or through publications, writings, or electronic media, as to the value
of or the advisability of trading in'' futures contracts, commodity
options, or leverage transactions; or ``(ii) for compensation or
profit, and as part of a regular business, issues or promulgates
analyses or reports concerning any of the activities referred to in
clause (i).'' 35 Thus, subject to certain statutory exclusions,
any persons who for compensation or profit engage in the business of
advising others concerning trading in futures or commodity options or
of issuing analyses or reports concerning such trading, are deemed CTAs
under the Act.
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\35\ 7 U.S.C. 1a(5)(A).
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A threshold requirement of the CTA definition is that the trading
advisory activity be undertaken for ``compensation or profit.'' This
does not, however, require that ``the `compensation or profit' flow
directly from the person or persons advised * * * [i]t is sufficient
that the compensation or profit is to result wholly or in part from the
furnishing of the services specified in section [1a(5)].'' 36
Accordingly, this requirement has been interpreted by Commission staff
to include direct or indirect forms of compensation or profit received
by a CTA, including the attraction of new customers or maintenance of a
customer base.37
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\36\ CFTC Interpretative Letter No. 75-11, [1975-1977 Transfer
Binder] Comm. Fut. L. Rep. (CCH) para. 20,098, at 20,763 n.6 (Office
of the General Counsel, Trading and Markets, September 15, 1975).
\37\ CFTC Interpretative Letter No. 76-10, [1975-1977 Transfer
Binder] Comm. Fut. L. Rep. (CCH) para. 20,157 (Office of the General
Counsel, April 22, 1976); CFTC Interpretative Letter No. 75-6,
[1975-1977 Transfer Binder] Comm. Fut. L. Rep. (CCH) para. 20,093
(Office of the General Counsel, Trading and Markets, August 13,
1975). For example, Commission staff have found the ``compensation
or profit'' requirement of the CTA definition satisfied where a
CTA's customers receive commission rebates from an FCM that are then
credited toward payment of the CTA's commodity information service
subscription fees. Division of Trading and Markets Interpretative
Letter No. 95-51, [Current Transfer Binder] Comm. Fut. L. Rep. (CCH)
para. 26,420 (May 1, 1995).
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The term ``commodity trading advice'' has been interpreted
expansively and includes particularized trading advice that recommends
specific transactions or trading methodologies as well as advice
concerning the ``value of or advisability'' of trading in futures or
commodity options. Consequently, one who advises others concerning the
value of using futures generally, without providing specific trading
recommendations, nonetheless is providing commodity trading advice.
Further, persons may provide commodity trading advice even though they
``are neither directly or indirectly involved in the solicitation of
funds or trades or the trading of accounts.'' 38 For example,
Commission staff have found that a publication that includes general
information on trading in commodity interests, detailed information on
price forecasting and specific advice on market conditions that signal
when persons should trade in the futures markets provides trading
advice.39 Commodity trading advice may include information already
contained in the public domain 40 and is not limited to trading
``recommendations.'' 41
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\38\ Division of Trading and Markets Interpretative Letter No.
96-56, [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) para.
________ (July 8, 1996).
\39\ Id.
\40\ Unpublished letter from Andrea M. Corcoran, Director,
Division of Trading and Markets, dated March 14, 1990 (``even
assuming that information contained in the [publication] is
available elsewhere in the public domain, it is our opinion that the
CTA definition includes an enterprise which is devoted to compiling
advice, reports or analyses of others with respect to futures
markets and to publishing such data in a book such as the
[publication] on a regular basis'').
\41\ Unpublished letter from Susan C. Ervin, Deputy Director/
Chief Counsel, Division of Trading and Markets, dated March 14, 1989
(noting that the absence of interpretative or analytical information
does not exclude a person from the definition of a CTA). ``The plain
terms of the statute indicate * * * that Congress intended to cover
all types of analyses and reports * * *, not just those that advise,
interpret or make recommendations.'' CFTC Interpretative Letter No.
76-25, [1975-1977 Transfer Binder] Comm. Fut. L. Rep. (CCH) para.
20,239 (Office of the General Counsel, December 6, 1976). Thus, a
person may provide commodity trading advice despite neither
analyzing nor making any predictions or representations about the
information provided.
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In applying the CTA definition, the Commission has recognized that
commodity trading advice may be provided through all forms of
communication, including electronic media. This conclusion is compelled
by the Act's express terms; as noted by Commission staff, ``[i]n
distinguishing between trading advice offered directly or through
publications, writings or electronic media, [the statutory CTA
definition] is clearly intended to reach `impersonal,' indirect forms
of trading advice and explicitly recognizes that commodity trading
advice may be given in forms other than personalized trading advice.''
42
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\42\ Division of Trading and Markets Interpretative Letter No.
95-101, [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) para.
26,565 (November 21, 1995). The Commission has recently filed
complaints addressing certain forms of alleged CTA activity
conducted by means of electronic media. For example, the Commission
and the Attorney General for the State of Florida jointly filed a
complaint, which was later amended to include a new defendant, in
CFTC v. JDI Limited Inc. d/b/a Future Vision, Case No. 95-6221-Civ-
Gonzalez (S.D. Fla.), charging defendants with, inter alia, acting
as unregistered CTAs and violating the antifraud provisions of the
Act in the marketing, sale and support of a computerized trading
program. Similarly, the Commission's complaint in In the Matter of
R&W Technical Services, Ltd., CFTC Docket No. 96-3, alleged that the
respondents had marketed and sold a computerized futures trading
system generating trading signals for transactions in various
financial futures contracts without being registered as CTAs. The
complaint also charged the parties with violations of antifraud
provisions of the Act by falsely advertising money-back guarantees
and hypothetical profits in magazines, telephone solicitations and
written promotional materials. The Commission expresses no opinion
on the merits or ultimate outcome of these cases.
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Commission staff have applied the CTA definition to ``persons who
make commodity interest trading advice available to the public through
mass media, such as newsletters, telephone hotlines or electronic
devices including computer software, rather than through direct
communication with individual persons.'' 43 Staff letters have
applied the CTA definition to, for example, designers and distributors
of computer software programs that generated commodity trading
recommendations or strategies; 44 a professor who received
compensation for applying research and periodically updating a computer
model used for trading commodity interests; 45 the distributor of
software that analyzed a United States dollar index; 46 and the
licensor of a computer software program who had developed and licensed
to more than fifty licensees various computerized trading systems that
allowed the licensees to input data setting the parameters of futures
transactions.\47\ These staff positions are consistent with
applications of the CTA definition to other impersonal or indirect
forms of communication, such
[[Page 42152]]
as newsletters and other print media 48 and telephone
hotlines.49
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\43\ Division of Trading and Markets Interpretative Letter No.
95-68, [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) para.
26,498 (August 10, 1995).
\44\ Id.
\45\ Division of Trading and Markets Interpretative Letter No.
94-51, [1992-1994 Transfer Binder] Comm. Fut. L. Rep. (CCH) para.
26,115 (May 10, 1994).
\46\ Division of Trading and Markets Interpretative Letter No.
93-27, [1992-1994 Transfer Binder] Comm. Fut. L. Rep. (CCH) para.
25,704 (April 2, 1993).
\47\ Division of Trading and Markets Interpretative Letter No.
84-9, [1982-1984 Transfer Binder] Comm. Fut. L. Rep. (CCH) para.
22,092 (March 1 and April 6, 1984).
\48\ Division of Trading and Markets Interpretative Letter No.
93-18, [1992-1994 Transfer Binder] Comm. Fut. L. Rep. (CCH) para.
25,694 (February 23, 1993) (publications issued on a monthly or
bimonthly basis which contained analyses and advice concerning
trading commodity interests, including gold, silver and platinum
contracts required registration as a CTA); CFTC Interpretative
Letter No. 75-3, [1975-1977 Transfer Binder] Comm. Fut. L. Rep.
(CCH) para. 20,090 (Office of the General Counsel, Trading and
Markets, July 31, 1975) (publisher of newsletter focusing on cash
commodity markets and that occasionally prints advice concerning the
use of agricultural futures for hedging purposes is a CTA); Division
of Trading and Markets Interpretative Letter No. 94-29, [1992-1994
Transfer Binder] Comm. Fut. L. Rep. (CCH) para. 26,020 (March 15,
1994) (responding to general questions regarding newsletter
publications and CTA registration and concluding that publisher of
newsletter offering market advice is not a CTA only if advice is
solely incidental to the publisher's business).
\49\ Division of Trading and Markets Interpretative Letter No.
93-43, [1992-1994 Transfer Binder] Comm. Fut. L. Rep. (CCH) para.
25,734 (May 19, 1993) (requiring CTA registration of IB using a
``900 line'' that provided prerecorded trade recommendations as well
as research, market and trade ideas); see also CFTC v. Ehrenberg,
[1982-1984 Transfer Binder] Comm. Fut. L. Rep. (CCH) para. 21,640,
at 26,429 (E.D. Ill. 1982) (party who advertised services as pork
belly trading specialist in commodities magazine and gave commodity
trading advice over telephone for a fee was required to register as
CTA).
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The Commission wishes to make clear that the nature and scope of
regulation of trading advisory activity under the CEA depends upon the
type of activity in which the advisor engages. For example, persons who
provide commodity trading advice but do so in a manner that is solely
incidental to the conduct of certain businesses or professions, such as
banking, news publishing or news reporting, are wholly excluded from
the definition of a CTA. Persons who provide commodity trading advice
but do not qualify for a statutory exclusion from the CTA definition
due to the fact that their trading advice is not incidental to the
conduct of their business or profession as, e.g., a publisher, are
required to register as CTAs and maintain specified records; however,
unless they are managing customer accounts, they are not subject to the
requirement to deliver a Disclosure Document. Finally, persons who
manage customer accounts, i.e., direct or guide accounts,50 are
required to register with the CFTC, deliver a Disclosure Document to
each prospective customer at or before the time at which he solicits
such customer, obtain a signed acknowledgment of receipt of the
Disclosure Document from the customer and maintain specified books and
records. Persons who solicit managed accounts for a CTA must be
registered as an AP of the CTA and provide the required Disclosure
Document at the time of or prior to solicitation of the customer. The
Commission provides guidance on a case-by-case basis concerning the
application of these requirements to particular business activities or
arrangements.
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\50\ Commission staff have stated that it is not necessary for a
person to have a power of attorney in order to be ``directing'' or
``guiding'' accounts. See, e.g., Division of Trading and Markets
Interpretative Letter No. 86-15, [1986-1987 Transfer Binder] Comm.
Fut. L. Rep. (CCH) para. 23,165 (July 22, 1986) (``[i]t should be
noted that, although the CTA has no power of attorney over the
account, he does have the power to control the client's trades'').
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a. Exclusions From the CTA Definition
The CEA provides an exclusion from the CTA definition for banks and
trust companies (and their employees), news reporters, columnists and
editors, lawyers, accountants and teachers, floor brokers or FCMs,
publishers or producers of print or electronic data of general and
regular dissemination (and their employees), contract markets, and
``such other persons not within the intent of this paragraph as the
Commission may specify by rule, regulation, or order.'' 51 These
exclusions apply only if the furnishing of such services by the
specified persons ``is solely incidental to the conduct of their
business or profession.'' 52
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\51\ 7 U.S.C. 1a(5)(B). For instance, Commission Rule 4.14
exempts from CTA registration various categories of persons,
including certain dealers, processors, brokers or sellers in the
cash market for commodities; a registered AP who provides trading
advice solely in connection with his employment as an AP; registered
CPOs who provide trading advice solely to pools for which they are
registered; persons who are exempt from CPO registration who provide
trading advice solely to pools for which they are exempt from
registration; and certain persons who are registered as investment
advisers under the Investment Advisers Act of 1940 or are excluded
from the definition of the term ``investment adviser.'' 17 CFR 4.14.
\52\ 7 U.S.C. 1a(5)(C). Pursuant to statutory amendments adopted
in 1982, the Act also provides that the Commission may, ``by rule or
regulation, include within the term [CTA] any person advising as to
the value of commodities or issuing reports or analyses concerning
commodities if the Commission determines that the rule or regulation
will effectuate the purposes of this paragraph.'' 7 U.S.C. 1a(5)(D).
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(1) Publisher or Producer of Electronic Data of General and Regular
Dissemination
The CEA's express exclusion from the CTA definition for publishers
and producers of print or electronic media applies only if two criteria
are met.53 First, a person must be ``the publisher or producer of
any print or electronic data of general and regular dissemination.''
(emphasis added). Second, ``the furnishing of such services * * * [must
be] solely incidental to the conduct of their business or profession.''
As construed by CFTC staff, the phrase ``general and regular
dissemination'' applies to publications whose ``primary purpose [is] to
disseminate news and other items appealing to the interest of all
segments of the business and financial community.'' 54 In
contrast, ``if a publication concentrates on disseminating analyses,
reports or recommendations bearing on a narrow area of interest, such
as * * * commodity futures trading,'' the staff has construed the
publication not to be ``a bona fide business or financial publication
of general and regular circulation'' for purposes of the statutory
exclusion from the CTA definition.55
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\53\ 7 U.S.C. 1a(5) provides in pertinent part:
(B) Subject to subparagraph (C), the term ``commodity trading
advisor'' does not include--
* * * * *
(iv) the publisher or producer of any print or electronic data
of general and regular dissemination, including its employees;
* * * * *
(C) INCIDENTAL SERVICES--Subparagraph (B) shall apply only if
the furnishing of such services by persons referred to in
subparagraph (B) is solely incidental to the conduct of their
business or profession.
\54\ Division of Trading and Markets Interpretative Letter No.
76-1, [1975-1977 Transfer Binder] Comm. Fut. L. Rep. (CCH) para.
20,135 (February 26, 1976) (emphasis added).
\55\ Id.
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(2) Solely Incidental
In defining ``solely incidental,'' the Commission does not rely on
a specific numerical standard or percentage of revenues or business
but, rather, considers the nature of the overall business and the
factual context in which the advisory services are rendered.56
Thus, ``a planned or periodic expression of views as to the
advisability of trading in commodity futures made by an FCM may be
solely incidental to its business[,] while the same advice rendered by
a publisher or bank may not.'' 57 Generally, if a publication has
a specialized focus upon futures transactions or is largely devoted to
futures trading, the commodity trading advice furnished therein will
not be considered to be solely incidental to the conduct of the
[[Page 42153]]
publisher's business.58 Conversely, if a publication covers a
broad range of topics and futures are not its predominant focus, the
commodity trading advice provided therein may be ``solely incidental''
to the conduct of the publisher's business. For example, Commission
staff have found that ``reprinting'' by an electronic information
service of, among other things, specific trading recommendations was
solely incidental to its broader business as an electronic information
and communications service, a general computer library whose files
included a ``broad range of many different types of information.''
59 However, advice furnished in a financial publication (and
related telephone newsline service) that was substantially focused on
metals futures, was not solely incidental to that entity's publishing
business, but in the words of the Commission, was ``the very point of
that business.'' 60 Similarly, where a newsletter devoted a
substantial number of issues to analyses of the futures markets and
specific trading recommendations, Commission staff found such advice to
be ``fundamental,'' rather than solely incidental, to the company's
business.61
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\56\ In the Matter of Armstrong, [1992-1994 Transfer Binder]
Comm. Fut. L. Rep. (CCH) para. 25,657 (February 8, 1993), rev'd on
other grounds sub nom., Armstrong v. Commodity Futures Trading
Commission, [1992-1994 Transfer Binder] Comm. Fut. L. Rep. (CCH)
para. 25,914 (December 21, 1993) [hereinafter Armstrong]; see also
52 FR 41975, 41978 (November 2, 1987) (discussing ``solely
incidental'' as used in Commission Rule 4.6).
\57\ Division of Trading and Markets Interpretative Letter No.
76-1, [1975-1977 Transfer Binder] Comm. Fut. L. Rep. (CCH) para.
20,135 (February 26, 1976).
\58\ Armstrong; CFTC Interpretative Letter No 75-4, [1975-1977
Transfer Binder] Comm. Fut. L. Rep. (CCH) para. 20,091 (Office of
the General Counsel, Trading and Markets, August 11, 1975).
\59\ Division of Trading and Markets Interpretative Letter No.
83-3, [1982-1984 Transfer Binder] Comm. Fut. L. Rep. (CCH) para.
21,842, at 27,538 (May 25, 1983) (describing the computer
information and communications service as ``computer library and
information distribution business'').
\60\ Armstrong, at 40,149.
\61\ CFTC Interpretative Letter No. 75-4, [1975-1977 Transfer
Binder] Comm. Fut. L. Rep. (CCH) para. 20,091, (Office of the
General Counsel, Trading and Markets, August 11, 1975). The United
States Supreme Court's interpretation of the term ``investment
adviser'' in SEC v. Lowe, 472 U.S. 181 (1985), as used in the
Investment Advisers Act of 1940 (``IAA''), does not mandate a
different result. In Lowe, after reviewing the language and
legislative history of the IAA, the Court held that Congress had
excluded publishers of generalized securities advice from the
definition of investment adviser. Although a ``facial parallel''
exists between the Section 1a(5)(B)(iv) of the CEA and Section
203(c) of the IAA (the exclusion for ``the publisher of a bona fide
newspaper, magazine or business of financial publication of general
and regular circulation''), unlike the investment adviser definition
of the IAA, the CTA definition in Section 1a(5)(C) of the CEA limits
the exclusions in Section 1a(5)(B), including the publishers'
exclusion of Section 1a(5)(B)(iv), to cases where ``the furnishing
of such services by the foregoing persons is solely incidental to
the conduct of their business or profession.'' Armstrong, at 40,149.
Consequently, as the Commission noted in Armstrong, ``[g]iven this
clear distinction between Congress' exclusionary language in [the
IAA and the CEA, the Commission is] not persuaded that the holding
in Lowe mandates a broad construction of the exclusion from the
definition of CTA for certain publishers.'' Id.
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b. Exemption From Registration for Persons Who Furnish Trading Advice
to Fifteen or Fewer Persons and Who Do Not Hold Themselves Out as CTAs
Section 4m(1) of the CEA provides an exemption from registration
for CTAs who during the preceding twelve months have not furnished
trading advice to more than fifteen persons and who do not ``hold
[themselves] out generally to the public as a commodity trading
advisor.'' 62 A CTA who identifies himself as a CTA or otherwise
refers to his advisory services or history on a public electronic forum
such as portions of the Internet or a proprietary on-line service may
not avail himself of the exemption under Section 4m(1). Such conduct
constitutes ``holding out'' to the public as a CTA.63 This view is
consistent with the SEC's views concerning the ineligibility of
offerings posted on the Internet for the Regulation D safe harbor from
registration. As stated by the SEC, ``[t]he placing of the offering
materials on the Internet would not be consistent with the prohibition
against general solicitation or advertising in Rule 502(c) of
Regulation D.'' 64
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\62\ 7 U.S.C. 6m(1).
\63\ See examples infra, at the conclusion of this section.
Likewise, a CPO who advertises a pool on the Internet, e.g., by
identifying himself as a CPO of a pool, may not obtain an exemption
from registration relief under Commission Rule 4.13(a)(1), inasmuch
as such advertising plainly negates one of the required elements of
the exemption. Commission Rule 4.13(a)(1) provides an exemption from
registration for a CPO if, among other things, ``it does not receive
any compensation, directly or indirectly, for operating the pool,
except reimbursement for ordinary administrative expenses of
operating the pool;'' ``[i]t operates only one pool at a time;'' and
``[n]either the person nor any other person involved with the pool
does any advertising in connection with the pool * * *.'' 17 CFR
4.13(a)(1) (emphasis added).
\64\ 60 FR at 53464. SEC Rule 502(c) prohibits ``any form of
general solicitation or general advertising'' and applies to
Regulation D offerings pursuant to SEC Rules 505 and 506. 17 CFR
230.502(c). Thus, CPOs who use electronic media in a manner
inconsistent with Regulation D may not obtain relief pursuant to
Commission Rule 4.8, which is available only with respect to
offerings pursuant to SEC Rules 505 and 506. 17 CFR 4.8.
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2. Directories and Compilations
In addition to using electronic media to communicate specific
commodity trading advice, market participants may engage in activities
that implicate registration duties and other CFTC requirements by
operating sites on the World Wide Web that compile information about
other registrants or futures-related subjects. For example, many
locations on the Internet provide central repositories for, directories
of, or mechanisms to access information compiled from multiple sources.
Persons who compile and reprint information, whether electronically or
on paper media, may be subject to the Commission's registration
requirements notwithstanding the fact that they did not originally
prepare the information disseminated. The terms ``advising'' and
``issues or promulgates'' are not limited to the author of such
materials but include the ``dissemination of another's views to third
persons.'' 65
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\65\ CFTC Interpretative Letter No. 76-24, [1975-1977 Transfer
Binder] Comm. Fut. L. Rep. (CCH) para. 20,234 (Office of the General
Counsel, August 17, 1976).
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Compilations of information may range from listings of performance
data for all publicly offered commodity pools, comparable to newspaper
listings of mutual fund returns, to narrowly focused descriptions of
the trading strategies and history of a single CTA. In determining
whether such compilations constitute either advice as to ``the value of
or the advisability of trading'' futures or commodity options or
``analyses or reports'' concerning such trading, as well as the
applicability of various statutory exclusions, the Commission considers
all of the relevant facts and circumstances. However, to facilitate use
of the Internet by commodity professionals, the Commission wishes to
clarify the status of certain types of publications of futures-related
data.
Publications that compile trading results for commodity pools
selected on an objective, neutral basis, e.g., all commodity pools of a
certain size or geographic location, could be viewed as providing
``reports or analyses'' concerning futures transactions and thus as
within the CTA definition. To the extent that such compilations are
presented by a publisher of print or electronic media of ``general and
regular dissemination'' in a manner solely incidental to that business,
the publisher would qualify for the statutory exclusion from the CTA
definition. The publisher of a newspaper of general circulation could
therefore publish, in a manner incidental to that business, the
performance results for all commodity pools or for all publicly traded
commodity pools without registration as a CTA or compliance with the
statutory and regulatory requirements applicable thereto.
If a compilation of performance data for publicly offered pools
were published by a firm that does not qualify as a publisher of data
of general and regular dissemination, e.g., a business devoted
exclusively or primarily to operating Internet sites
[[Page 42154]]
providing data concerning CTAs and CPOs, the statutory ``publisher''
exclusion would not apply. However, the Commission believes that
provided such data are developed using objective, neutral criteria,
such as size or geographical location, and presented as such by a bona
fide news organization for the purpose of providing current market
data, registration as a CTA should not be required.66 Similarly,
an unbiased compilation of all registered CTAs in a given location,
clearly described as such and without any express or implied evaluation
or suggestions as to the quality of the services such persons provide,
may be viewed as equivalent to the telephone ``yellow pages''
directory, and would not implicate the Commission's registration
requirements. However, compilations of selected CTAs, or of CTAs who
pay a fee for inclusion in a list, may not be neutrally developed
compilations and may, in effect, promote the services of selected CTAs.
If the provider of this information is compensated for or receives
profit from such activities, absent the applicability of a specific
exclusion, that person is required to register as a CTA.67
Moreover, even absent such compensation, the presenter of such data may
be soliciting discretionary accounts on behalf of one or more CTAs and
thus required to register as an AP of such CTA, or as a CTA.
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\66\ The Commission stresses, however, that providing even
objective market or performance history data in the context of a
publication that has the purpose or effect of providing or marketing
trading advisory services would require CTA registration. Thus, a
newsletter published to communicate the trading advice of a
particular CTA or to promote a CTA ``hotline'' service and also
including performance data for commodity pools would implicate the
CTA definition, notwithstanding that such performance data are
objectively developed, because the publication is predominantly one
designed to provide trading advice. Thus, whether a particular
presentation constitutes trading advice depends upon the facts and
circumstances in which the presentation is made and the
representations, express or implied, made concerning the content of
the presentation.
\67\ As noted above, compensation in this context does not
require that payment be received for the communication in question.
Rather, if the provider of such data profits from presenting it,
even indirectly, such as by promoting its own services, the
statutory ``compensation or profit'' standard is satisfied.
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Compilations presented on electronic media may contain actual
descriptive data or simply a collection of hyperlinks. Hyperlinks, a
prominent feature of the World Wide Web, enable a user to connect from
one location or document to another, a facility without apparent
analogy in paper-based media. Hyperlinks consist of an address or
phrase which, when activated by a click of the mouse, connects the user
to another location on the Internet. The Commission's website, for
example, has hyperlinks to a number of World Wide Web sites, including
each of the United States contract markets. Internet directories such
as Yahoo and Magellan are basically organized collections of
hyperlinks. Hyperlinks, although fundamentally a connective mechanism
between websites, nonetheless can be used in such a manner as to
communicate advice about the value of or advisability of trading in
commodity interests, e.g., by labeling, describing, or otherwise
introducing the hyperlinked sites. This would be the case, for example,
where the operator of a website provides editorial comment about the
hyperlinks or provides a list of hyperlinks that represent a pre-
selected, defined category of persons or services, whose attributes or
qualifications are thereby highlighted.68 In such a case, the
person providing the hyperlinks would be required to register as a CTA.
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\68\ In this case, the hyperlink communicates the views of the
website operator as to the quality of the services addressed or
referred to at the hyperlinked site.
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However, hyperlinks can also be used in a manner that would not
require a person to register as a CTA. For example, the Commission
believes that merely providing a list of hyperlinks that is the
equivalent of a telephone directory or other broad-based source of
``locational'' data, without more, would not make one a CTA because
hyperlinks in this context do not necessarily speak ``as to the value
of or the advisability of trading in'' commodity interests. Similarly,
a website that contains a search or query function that allows visitors
to construct searches to obtain data responsive to certain criteria
they select would not be considered to be providing trading advice,
provided that the website merely provides the ``data library'' and the
search vehicle for the viewer's use.69
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\69\ This analysis would apply without regard to the criteria
selected by the viewer, which could, for example, call for all pools
with rates of return above a specified threshold or for presentation
of pools in order of rates of return (e.g., high-to-low). However, a
website that contained this search feature, but also contained
evaluative or mathematical services (e.g., for the calculation of
relative rates of return or volatility of returns) would, however,
indicate a different result.
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3. Applicability of Antifraud Provisions
Persons using electronic media are subject to the same statutory
and regulatory requirements under the CEA, including the statutory and
regulatory antifraud prohibitions and related rules pertaining to CTAs
and CPOs, as those using other media. These include the antifraud
provisions of the CEA, including Section 4o,70 as well as the
provisions of Commission Rule 4.41. Rule 4.41 prohibits CPOs, CTAs, or
any principals thereof from advertising in a manner which employs any
fraudulent device or involves any transaction or course of business
which operates as a fraud or deceit upon any pool participant or client
or prospective participant or client. Rule 4.41 also bars the
presentation of any hypothetical or simulated performance data unless
it is ``prominently'' accompanied by a prescribed cautionary
statement.71 Both the statutory antifraud provisions and Rule 4.41
apply to CTAs, CPOs, and their principals, regardless of whether they
are exempt from registration under the CEA.72 Rule 4.41 expressly
applies to ``any publication, distribution or broadcast of any report,
letter, circular, memorandum, publication, writing, advertisement or
other literature or advice, including the texts of standardized oral
presentations and of radio, television, seminar or similar mass media
presentations.'' 73 The requirements of Rule 4.41 thus apply fully
to electronic media such as the Internet.
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\70\ 7 U.S.C. 6o provides that no CPO, CTA, or any associated
persons thereof, may use ``any means or instrumentality of
interstate commerce, directly or indirectly--(A) to employ any
device, scheme or artifice to defraud any participant or client or
prospective client; or (B) to engage in any transaction, practice or
course of business which operates as a fraud or deceit upon any
participant or prospective client or participant.''
\71\ 17 CFR 4.41(b); In re Armstrong, [Current Transfer Binder]
Comm. Fut. L. Rep (CCH) para. 26,332 (CFTC March 10, 1995), aff'd
sub nom. Armstrong v. CFTC, No. 95-3161 (3d Cir. January 19, 1996),
cert. denied, 64 U.S.L.W. 3821 (June 10, 1996). Commission Rule
4.41(b) requires that hypothetical or simulated performance data be
accompanied either by the statement specified in Rule 4.41(b)(1) or
a comparable statement promulgated by a registered futures
association. The NFA's cautionary statement can be found in NFA Rule
2-29.
\72\ See 7 U.S.C. 6o; 17 CFR 4.41(c)(2).
\73\ 17 CFR 4.41(c)(1).
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The Commission also notes that capabilities peculiar to the
Internet, such as anonymity and the ability to operate through aliases
(e.g., electronic mail addresses, user names), that obscure a person's
true identity or business affiliation may be exploited in a manner that
operates as a fraud. For example, the use of ``testimonials''
purportedly from third parties but actually created by the CTA or CPO
that is the subject of the ``testimonial'' would constitute a
fraudulent practice under statutory antifraud provisions and Rule 4.41.
[[Page 42155]]
The following examples are illustrative of the requirements
discussed above.
(1) (General Internet Directory Not a CTA) Company XYZ operates
a website that provides a directory of hyperlinks to the World Wide
Web. XYZ has broad listings under such topics as Arts, Business and
Economy, Computer and Internet, Education, Entertainment,
Government, Health, News, Recreation and Sports, Reference,
Regional, Science, Social Science and Society and Culture. Within
the Business and Economy section is a subsection covering Futures
and Options. Among the hyperlinks in the Futures and Options
sections are those of a number of CTAs. XYZ does not charge CTAs for
listings in its directory; XYZ's revenues are derived solely from
advertising on its homepage. XYZ does not exercise any discretion as
to the inclusion of any CTA on its directory, and any CTA requesting
inclusion will be included; these facts are prominently disclosed.
XYZ provides no information about the content of the CTA sites to
which hyperlinks are provided. XYZ qualifies for the exclusion from
the definition of a CTA for a producer or publisher of information
of general and regular dissemination since its homepage provides
information across all subject matters and the information provided
by such links is solely incidental to its business, which is to
provide an index of the World Wide Web.
(2) (Recommending or Evaluating CTAs) Company XYZ operates a
website that contains a list of hyperlinks to CTAs described as the
``Ten Best CTAs for 1996.'' Each of the ten CTAs featured on XYZ's
homepage is required to pay XYZ a fixed fee. In this scenario, XYZ
is a CTA and is required to register as such. By making evaluative
representations about the featured CTAs, XYZ is providing advice
about the value of or advisability of trading in commodity
interests. Since XYZ receives a fee from each of the ten featured
CTAs, the compensation element of the CTA definition is satisfied.
Absent the availability of an exclusion from the CTA definition, XYZ
must register as a CTA.
(3) In the same factual scenario as in Example (2), XYZ does not
receive a fee from each of the listed CTAs, but instead receives
revenues from various advertisers on its website. In this case too,
XYZ is required to register as a CTA. The profit or compensation
element of the CTA definition includes fees received from
advertisers and need not flow directly from the person or persons
advised or from the featured CTAs.
(4) (Disclaimers) Same facts as Example (2) above, except that
XYZ also provides a disclaimer on its website that states ``All
materials and information provided with respect to the CTAs
contained herein are not intended as commodity trading advice and we
make no specific recommendations with respect to which CTA best
suits your investment needs. The information is intended to enhance
your futures investment decisions, not make them for you.'' Again,
XYZ would be required to register as a CTA. XYZ has provided trading
advice and cannot by disclaimer alter the reasonably anticipatable
effects of the information provided or the consequent registration
requirements under the Act.
(5) (Providing Leads) WXY is in the business of generating leads
and mailing lists for third party vendors who are engaged in various
businesses. For a monthly fee, WXY's lead generating services are
open to all businesses who wish to obtain mailing lists to solicit
customers. WXY's website on the World Wide Web allows site visitors
to ``sign up'' to receive information on products and services that
are of particular interest to the site visitors by allowing the site
visitors to click on various listed categories (e.g., ``Click here
if you would like to receive information on computers; Click here if
you would like to receive information on insurance products''). One
of the categories allows site visitors to click on a particular
location if they are interested in receiving commodity trading and
investment information. Site visitors are asked to register in a
guest book which requests their name, electronic mail address,
street address, income and other information.
WXY forwards to various CTAs the names of and other information
concerning the persons who requested information on commodity
trading and investments. By engaging in such activities, WXY would
be operating as a ``finder'' since its purpose would be to seek
clients on behalf of Commission registrants. WXY must therefore
register as an AP of the CTAs to whom it furnishes customer names,
or as a CTA.
(6) (Electronic Mail to Specific Address May Not Defeat 4m(1)
Exemption) John Doe, a school teacher who studies the stock and
futures markets for his own financial benefit and trades futures
contracts for his own account, discusses his trades with his college
roommate and friend, George, and two other friends whom he has known
for twenty years. The three friends ask John to furnish commodity
trading advice to them and John agrees to act as their CTA. John is
not registered with the Commission in any capacity, has not
previously furnished commodity trading advice to any other persons,
and has not held himself out generally to the public as a CTA. John
and his three friends all have computers and electronic mail
addresses and all four persons use electronic mail on a regular
basis to communicate with one another. John's three friends agree
that John may provide them with commodity trading advice and other
information relating to their commodity accounts through electronic
mail to their electronic mail addresses to which only they have
access. John's use of an individual electronic mail address for
purposes of communicating commodity-related information to his three
friends would not in this case defeat a potential Section 4m(1)
exemption from CTA registration because the electronic mail
communication in this instance is personal and direct and is limited
to electronic correspondence with those three individuals.
(7) (Placing Performance Data on a Generally Accessible Internet
Site Would Be Inconsistent With 4m(1) Exemption) Same facts as above
except John also operates a website and he posts the performance
data of his friends' trading accounts on his website. By placing the
performance data on a public electronic forum that can be readily
accessed by others, John would be holding himself out as a CTA and
thus would not satisfy one of the criteria of the Section 4m(1)
exemption from CTA registration.
(8) (Providing Telephone Directory for CTAs Does Not Require
Registration as CTA) XYZ operates a website that contains a
directory which it represents to be a list of each registered CTA,
containing the name, address, and telephone number for each CTA.
Although XYZ may receive compensation from advertisers on its
website, XYZ is not required to register as a CTA. In this case, the
limited information provided on each CTA does not constitute
commodity trading advice. Further, by providing a complete directory
of all registered CTAs, and representing it as such, XYZ is making
clear that it is not promoting or recommending any particular CTA
but, rather, is providing a directory which interested persons can
use to contact CTAs of their choice. Further, as XYZ provides an
equivalent level of data for each registered CTA, it does not
implicitly recommend or favor one CTA over another.
(9) (Providing Biographical and Descriptive Information on
Selected CTAs in a Manner That Implies Evaluation or Recommendation
Requires Registration as CTA) XYZ operates a website that contains a
directory listing each registered CTA, containing the name, address,
and telephone number for each CTA. Additionally, for certain CTAs,
XYZ provides information concerning the types of trading programs
they utilize and certain performance data. XYZ does not charge
visitors to its website for access to this information but is
compensated by CTAs for displaying advertisements at the top of
certain web pages. Under these circumstances, XYZ must register as a
CTA. Presentation of a compilation of biographical and descriptive
data on certain CTAs has the effect, whether intended or otherwise,
of promoting, recommending, or marketing the services provided by
such CTAs. This conclusion is not affected by the fact that XYZ
provides very basic biographical data on all CTAs, since XYZ has
plainly distinguished among CTAs and highlighted certain CTAs for
specialized attention. Moreover, XYZ is compensated for providing
this information. As a result, absent the applicability of a
specific exclusion, XYZ is required to register as a CTA.
(10) (Compensation or Profit Includes Offer of Free Services for
a Limited Time) RST has created a new daily ``e-zine'' on the World
Wide Web that is principally devoted to commodity trading advice
provided by RST and promotion of RST's advisory services. To promote
this new e-zine, RST is offering free trial subscriptions for a
limited time, e.g., ninety days. After this initial trial period,
users must pay RST's rate of $20 per week. RST is required to
register as a CTA. Even though RST is offering free subscriptions to
all persons during its start-up period, it is nonetheless operating
the ``e-zine'' and providing commodity trading advice for
compensation or profit. As discussed above, the ``compensation or
profit'' element of the
[[Page 42156]]
CTA definition includes the attraction of new customers.
(11) (Gratuitous Leads, Discussions in Chat Rooms) Sally Smith,
an accountant, frequently interacts with other persons via a
financial investment ``chat room'' on a major on-line service.
During the course of these interactions, she advises other persons
in the chat room concerning a recent investment she made in a
commodity pool. She informs others in the chat room that she is
exceptionally pleased with the returns on her investment and that
she believes that the CPO is an excellent investment manager. In
support of her remarks, she also provides the pool's performance
data. Neither the CPO, its principals or anyone involved in the
pool's operation is affiliated with Sally Smith or her employer. She
does not receive any compensation or other consideration for her
participation in the chat room, from the CPO, others in the chat
room, the site provider, or otherwise, whether directly or
indirectly. Sally Smith would not be required to register with the
Commission as her chat room activity and the information that she is
providing is strictly gratuitous.
(12) (Compensated Leads, Discussions in Chat Rooms) If in the
same factual scenario as above in Example (11), Sally Smith is
compensated by the CPO for soliciting members from the chat room,
then Sally Smith would be required to register as an AP of the CPO.
(13) (Use of Aliases, if Undisclosed, May Be Fraudulent) In the
same factual scenario as Example (11), Dave Doe, the CPO for the
``Futures Pool,'' is also in the chat room. Unlike Sally Smith, Dave
Doe does not use his real name when communicating with others in
chat rooms; he uses the alias ``HonestMan.'' Under this alias, Dave
Doe tells others in the chat room that he has heard that the
``Futures Pool'' is an ideal pool for first time investors because
it offers excellent performance and low fees. In response to an
inquiry from someone in the chat room, ``HonestMan'' also states
that ``he has never heard of anyone losing money who invested in the
Futures Pool,'' which he knows to be untrue. Dave Doe is in
violation of the antifraud provisions of Section 4o of the CEA and
Commission Rule 4.41. Additionally, Dave Doe has violated Commission
Rule 4.21(a) because he has solicited prospective pool participants
for the ``Futures Pool'' but has not delivered its Disclosure
Document.
(14) (Hypothetical Performance Must Be Accompanied by Cautionary
Statement of Rule 4.41(b)) LMN is a registered CTA who operates a
website. LMN's website contains a table of contents. One of the
items listed is a hyperlink to ``Hypothetical Performance.'' On the
Hypothetical Performance section of its website, which can be
accessed only after a person has received a copy of LMN's Disclosure
Document, LMN demonstrates that based upon hypothetical performance
results, its trading program yields an annualized return of in
excess of 60 percent. LMN does not provide any statements about the
significance of hypothetical performance. LMN only states, in bold
faced type, that ``Past Performance is No Guarantee of Futures
Results'' and ``Futures Trading Entails Substantial Risk and May Not
be for Everyone.'' LMN is in violation of Commission Rule 4.41(b),
which requires that hypothetical or simulated performance be
accompanied by the legend set forth in Rule 4.41(b)(i) or prescribed
by the NFA pursuant to 4.41(b)(ii). In order to comply with Rule
4.41(b), LMN is required to post either the CFTC's or NFA's legend
regarding hypothetical performance on the same webpage as, and
presented so as to ``prominently'' accompany, the presentation of
the hypothetical performance. LMN also may be in violation of the
antifraud provisions of Section 4o the CEA.
(15) (Editing Unfavorable Comments From Guestbook May Violate
Rule 4.41) ABC is a CTA who maintains as part of its website an
interactive guestbook on which individuals post comments or
questions concerning ABC's trading system. ABC, which operates the
website, has the ability to edit the comments received. ABC's
website description of the guestbook implies that any person can
post comments on the guestbook, both favorable or unfavorable. If
ABC then edits any unfavorable comments he receives without
indicating this fact to visitors, ABC may violate Rule 4.41. ABC
also may be in violation of the antifraud provisions of Section 4o
of the CEA.
B. Solicitation Activity
1. Registration
Other types of communication by means of electronic media may
constitute solicitation activity, which gives rise to both registration
and disclosure duties. Section 4k(3) of the Act requires registration
as an AP of a CTA of any person associated with a CTA ``as a partner,
officer, employee, consultant, or agent (or any person occupying a
similar status or performing similar functions), in any capacity which
involves (i) the solicitation of a client's or prospective client's
discretionary account or (ii) the supervision of any person or persons
so engaged.'' \74\ Similarly, Section 4k(2) requires the registration
as APs of persons associated with a commodity pool operator ``as a
partner, officer, employee, consultant, or agent (or any person
occupying a similar status or performing similar functions), in any
capacity that involves (i) the solicitation of funds, securities, or
property for a participation in a commodity pool or (ii) the
supervision of any person or persons so engaged.'' \75\
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\74\ 7 U.S.C. 6k(3).
\75\ 7 U.S.C. 6k(2).
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``Solicitation'' activity has been construed by Commission staff to
include conduct that ``influences even indirectly the investment of
customer funds.'' \76\ For example, Commission staff have found that
initiating telephone contacts to identify persons interested in
receiving information about futures trading \77\ and introduction of
potential investors to a CPO for compensation,\78\ may constitute
solicitation activity requiring registration. The breadth of the media
encompassed by the definition of ``solicitation'' is comparable to that
of the underlying CTA and CPO definitions, which are written broadly to
reach all modes of communication and conduct. For instance, the CPO
definition uses several alternative formulations of the transfer of
consideration to the CPO, i.e., ``solicit,'' ``accept'' and ``receive''
funds, securities, or property for the purpose of trading in futures
contracts. As stated by CFTC staff, these formulations indicate that
Congress ``intended to achieve the broadest possible effect--namely, to
cover all of the means by which a person can obtain control over pool
participants funds.'' \79\ Similarly, as
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\76\ Division of Trading and Markets Interpretative Letter No.
90-11, [1990-1992 Transfer Binder] Comm. Fut. L. Rep. (CCH) para.
24,872 (June 12, 1990). In Congressional discussions occurring prior
to the establishment of the Commission as an independent regulatory
authority, the Subcommittee on Special Business Problems of the
Permanent Committee on Small Business noted that:
In order to adequately protect the investing public, the
subcommittee feels that registration requirements and fitness checks
should be imposed on commodity solicitors, advisors, and all other
individuals who are involved either directly or indirectly in
influencing or advising the investment of customers' funds in
commodities. This would include any individuals or organizations
identified as influencing or actually investing funds in the
commodities markets.
Subcommittee on Special Business Problems of the House Permanent
Select Committee on Small Business, H.R. Rep. No. 93-963, 93d Cong.,
2d Sess. at 36-37 (1974) (emphasis added).
\77\ See Division of Trading and Markets Interpretative Letter
No. 90-11, [1990-1992 Transfer Binder] Comm. Fut. L. Rep. (CCH)
para. 24,872 (June 12, 1990); Division of Trading and Markets
Interpretative Letter 90-8, [1990-1992 Transfer Binder] Comm. Fut.
L. Rep. (CCH) para. 24,831 (May 7, 1990). The Commission's Office of
the General Counsel (``OGC'') has stated that employees of a
registered FCM are required to register as APs if they initiate
customer contact by telephoning prospective customers even if their
responsibilities are limited to determining customer interest in
speaking with a registered representative or receiving promotional
literature and referring interested customers to a registered AP.
OGC concluded that the initiation of telephone contact constituted a
solicitation requiring registration as an AP. CFTC Interpretative
Letter No. 77-8, [1977-1980 Transfer Binder] Comm. Fut. L. Rep.
(CCH) para. 20,430 (Office of the General Counsel, May 16, 1977).
\78\ See, e.g., Division of Trading and Markets Interpretative
Letter No. 90-4, [1987-1990 Transfer Binder] Comm. Fut. L. Rep.
(CCH) para. 24,588 (January 31, 1990)(a person who introduces a
potential investor to a CPO and who is compensated as a ``finder''
would be soliciting on behalf of the CPO and thus required to
register as an AP thereof).
\79\ CFTC Interpretative Letter No. 75-17, [1975-1977 Transfer
Binder] Comm. Fut. L. Rep. (CCH) para. 20,112 (Office of the General
Counsel, Trading and Markets, November 4, 1975).
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[[Page 42157]]
noted above, the CTA definition refers to multiple types of media,
including electronic media, as vehicles for providing trading advice.
The Internet provides a medium for a potentially broad range of
solicitation and promotional activity, as well as for conveying trading
advice. Plainly, CTAs and CPOs who use electronic media to inform
members of the public of their futures activities are engaged in the
solicitation of prospective customers. Thus, most websites of CTAs and
CPOs on the World Wide Web are forms of solicitation. This is true even
if the website is limited to biographical or descriptive information,
for such data announces the CTA's or CPO's business to prospective
clientele and can reasonably be assumed to elicit the interest of
potential customers.
Similarly, a website that is not operated by a CTA or CPO, but
which identifies potential customers for one or more CTAs or CPOs or
evokes potential customer interest in such CTAs or CPOs generally would
constitute a solicitation. For example, a website marketing the trading
programs of selected CTAs would constitute a solicitation on behalf of
such CTAs. Likewise, the operator of a website that accepts and
forwards to a CTA or CPO the names and addresses of potential
customers, and receives compensation for such referrals from the CTA or
CPO, would be soliciting on behalf of the CTA or CPO. Consequently, the
operators of such sites may be required to register as APs of the CTA
on whose behalf the solicitation was undertaken,80 and as an AP of
the CPO on whose behalf the solicitation occurs.
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\80\ If such persons are already registered as CTAs or CPOs,
registration as an AP of that registration category is not required.
Further, the definition of an AP of a CTA includes only persons who
are involved in ``(i) the solicitation of a client's or prospective
client's discretionary account or (ii) the supervision of any person
or persons so engaged.'' 7 U.S.C. 6k(3). Thus, the appropriate
registration category for persons who solicit on behalf of CTAs who
do not manage accounts is that of CTA, as they are providing trading
advice by advising concerning or marketing the services of certain
CTAs.
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2. Required Delivery of Disclosure Document
Commission regulations require that at or before the time a CTA
solicits or enters into an agreement to direct or guide a customer's
account,81 or a CPO directly or indirectly solic its, accepts or
receives funds from a pool participant,82 such CTA or CPO must
``deliver or cause to be delivered'' to the prospective client or pool
participant a Disclosure Document that conforms to the applicable
rules.83 The requirement to deliver a Disclosure Document attaches
irrespective of the medium through which solicitation occurs.
Consequently, a CTA or CPO soliciting prospective customers or pool
participants by means of electronic media must ``delive[r] or caus[e]
to be delivered'' a required Disclosure Document prior to such
solicitation by prominently providing a copy of that document at, or
through hyperlinks with, the same site at which the solicitation occurs
or by delivering a hardcopy Disclosure Document to a prospective
customer prior to providing access to any electronic
solicitation.84 Application of the delivery requirement in the
context of electronic media is discussed below in the following
section.
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\81\ Rule 4.31(a) provides:
No commodity trading advisor registered or required to be
registered under the Act may solicit a prospective client, or enter
into an agreement with a prospective client to direct the client's
commodity interest account or to guide the client's commodity
interest trading by means of a systematic program that recommends
specific transactions, unless the commodity trading advisor, at or
before the time it engages in the solicitation or enters into the
agreement (whichever is earlier), delivers or causes to be delivered
to the prospective client a Disclosure Document for the trading
program pursuant to which the trading advisor seeks to direct the
client's account or to guide the client's trading, containing the
information set forth in Secs. 4.34 and 4.35.
17 CFR 4.31(a).
\82\ Rule 4.21(a) provides:
No commodity pool operator registered or required to be
registered under the Act may, directly or indirectly, solicit,
accept or receive funds, securities or other property from a
prospective participant in a pool that it operates or that it
intends to operate unless, on or before the date it engages in that
activity, the commodity pool operator delivers or causes to be
delivered to the prospective participant a Disclosure Document for
the pool containing the information set forth in Sec. 4.24; * * *.
17 CFR 4.21(a).
\83\ The Disclosure Document required to be furnished by a CTA
must contain the information set forth in Rules 4.34 and 4.35. The
Disclosure Document required to be furnished by a CPO must contain
the information set forth in Rules 4.24 and 4.25.
\84\ As discussed below, CTAs and CPOs may provide an outline or
table of contents of the website prior to the reader receiving a
Disclosure Document.
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With respect to CTAs, the requirement to deliver a Disclosure
Document applies only where the CTA solicits a prospective client to
``direct'' or ``guide'' his account.85 The term ``direct'' as used
in Rule 4.31 refers ``to agreements whereby a person is authorized to
cause transactions to be effected for a client's commodity interest
account without the client's specific authorization.'' 86 Although
the term ``guide'' is not defined in Part 4, the Commission referred to
the term ``guide'' in implementing regulations requiring the delivery
of a Disclosure Document by CTAs.87 In that release, the
Commission stated that Rule 4.31 ``established disclosure requirements
for CTAs that seek to control clients' accounts (e.g., through managed
accounts) or influence clients' commodity interest trading by means of
a systematic advisory program (e.g., through guided accounts).''
88 Thus, CTAs who solicit actual or prospective clients through
electronic media for purposes of directing or guiding customer accounts
must provide each such customer with a Disclosure Document at or before
the time of solicitation. CTAs who do not direct or guide customer
accounts, e.g., those who provide trading advice in a newsletter, would
not be required to provide prospective clients with a Disclosure
Document.
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\85\ See discussion of managing customer accounts, supra note
50.
\86\ 17 CFR 4.10(f).
\87\ 44 FR 1918, 1923 (January 8, 1979).
\88\ Id.
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The following examples are illustrative of the requirements
discussed above.
(16) (Posting Promotional Materials is a Solicitation Requiring
Disclosure Document Delivery) XYZ is a CTA who operates a site on
the World Wide Web. On its website, XYZ provides a description of
its principals and a brief summary of its trading strategy and the
types of accounts it manages. XYZ also provides its phone number and
electronic mail address for interested persons to contact it. XYZ
does not provide a copy of its Disclosure Document. In this case,
XYZ is violating Rule 4.31(a) because it is soliciting prospective
clients without delivering a Disclosure Document.89
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\89\ Guidance regarding the manner by which CTAs and CPOs may
deliver Disclosure Documents by means of a website is provided in
the following section.
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(17) (Posting Descriptive Performance Information or Performance
Data is a Solicitation Requiring Disclosure Document Delivery). JKL,
a registered CPO, operates a site on the World Wide Web. The website
provides biographical information about the principals of the CPO
and investment opportunities that the CPO offers, including various
commodity pools with differing risk parameters and performance
histories. JKL's website also posts summary performance information
for the various commodity pools. The posting of biographical and
investment information operates as a solicitation, as does posting
of summary performance data. Thus, JKL would be required to provide
the Disclosure Documents for its various pools to the website
visitors at or before the time it engages in the solicitation. JKL
must provide its Disclosure Documents either directly on its website
or by means of prominently highlighted hyperlinks from its website
and ensure that visitors receive the Disclosure Documents at the
same time as or before their viewing of other website materials,
i.e., the time at which the solicitation occurs. The
[[Page 42158]]
reader must review the Disclosure Document before being permitted
access to the biographical and other information. JKL also must
inform visitors that, in addition to reviewing the various
Disclosure Documents on-line, they may obtain printed copies of the
Disclosure Documents upon request.
(18) Same facts as above, except JKL's website does not provide
a copy of JKL's Disclosure Documents or hyperlink to them. Rather,
following the performance data, the website provides a telephone
number that persons can call to request the delivery of specific
commodity pool Disclosure Documents. The placement of performance
information on a website followed by a telephone number that
visitors can call to request a Disclosure Document would be
insufficient to satisfy the requirements of Rule 4.21(a) as delivery
of the Disclosure Document would not accompany or precede the
solicitation.
(19) (Delivering a Disclosure Document Necessary for
Solicitation of Prospective Pool Participants) ABC is a registered
CPO who operates a website on the World Wide Web. On its website,
ABC provides a brief description of the various commodity pools it
offers. ABC also provides copies of each of its Disclosure
Documents, in an acceptable format, which visitors to its website
must access from a menu of options at the beginning of its homepage,
before proceeding to any further information concerning one of the
offered commodity pools. By providing access to each of its
Disclosure Documents and assuring that the prospective participant
accessed the relevant Document before receiving any information
other than a brief description of the pool, ABC has complied with
Rule 4.21(a), which requires that at or before the time a CPO
solicits a prospective participant, the CPO deliver to the
prospective client a Disclosure Document for such commodity pool.
(20) (Term Sheet Cannot Replace Disclosure Document) In the same
example as above, instead of providing the Disclosure Documents for
each of the pools, ABC provides a notice of intended offering and
statement of the terms of the intended offering (``term sheet'').
ABC's pools do not accept investors who are not ``accredited
investors,'' as defined in 17 CFR 230.501(a). Nevertheless, ABC has
not satisfied the criteria of Rule 4.21(a). Since ABC's term sheet
can be accessed by persons who are not ``accredited investors,'' ABC
is soliciting such persons without having provided a copy of its
Disclosure Document.
(21) (Distribution of Promotional Materials Through Personal
Electronic Mail is a Solicitation Requiring Disclosure Document
Delivery) ABC is a CTA who operates a site on the World Wide Web.
Visitors to ABC's website, who may not have reviewed ABC's
Disclosure Document, are invited to give their electronic mail
address so that ABC can put them on its electronic mailing list.
Periodically, ABC sends to those persons who have provided
electronic mail addresses information concerning ABC's monthly
performance results. Use of electronic mail in this manner operates
as a form of solicitation. Accordingly, ABC may not send performance
data or comparable information to prospective clients by means of
electronic mail unless it has previously delivered its Disclosure
Document to them. Failure to deliver a Disclosure Document to
persons whom it solicits by electronic mail would constitute a
violation of Rule 4.31.
ABC may periodically send electronic mail to prospective clients
after they have received a copy of its Disclosure Document for as
long as that Disclosure Document remains valid. If, however, ABC
revises its Disclosure Document to reflect changes in its trading
program, or the Document becomes out of date, ABC would be required
to cease sending electronic mail to prospective clients until after
it has delivered to each such client a copy of its new Disclosure
Document.
III. Electronic Delivery of Disclosure Documents
The Commission is cognizant of the potential benefits of electronic
communication of information among participants in the futures markets
generally and in the managed futures marketplace in particular.
Electronic technology may enhance information access by market users
and facilitate communication by brokers and other commodity
professionals. A number of CTAs and CPOs have expressed interest in
using electronic media to provide existing and prospective clients or
pool participants with Disclosure Documents and other required
disclosures. A central goal of this release is to provide guidance as
to the circumstances in which electronic media may be used for these
purposes.
The Commission believes that, as a general matter, the requirements
that CTAs and CPOs deliver Disclosure Documents to prospective clients
and pool participants, respectively, may be satisfied by the use of
electronic media, provided appropriate measures are taken to assure
that the purposes of the delivery requirement are achieved. By this
release, the Commission is giving notice that CTAs and CPOs may use
electronic media in accordance with the criteria discussed below
90 to satisfy the Disclosure Document delivery requirement as to
consenting prospective customers and pool participants and to provide
certain related documents, as specified below. The Commission invites
comment on these criteria and any additional criteria that commenters
believe to be relevant in this context.
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\90\ Some of these criteria have been noted by the SEC in its
releases on electronic media. See 61 FR 24644; 60 FR 53458.
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A. Criteria
Consistency. The Commission believes that it is important to
maintain consistency in the application of regulatory requirements as
between electronic and non-electronic media. Information conveyed
electronically must achieve the same objectives as paper-based
communications. Further, the rules applicable to such communications
should not favor one form of communication over another; to the extent
possible, they should be ``form neutral.'' The medium for providing
required information should be selected based upon the relative merits
of the two methods of communication, not the application of the
Commission's regulations.
Choice/Consent. Although the Commission supports the use of
electronic media to enhance the speed and efficiency of communications
by futures professionals with market participants, it recognizes that
even among those persons who have access to electronic delivery, many
may prefer to receive information in paper form. Accordingly, a CTA or
CPO may use electronic delivery in lieu of traditional paper-based
delivery of a Disclosure Document only where the intended recipient
provides informed consent to receipt of the document by means of
electronic delivery. Similarly, informed consent also must be obtained
from a pool participant if a CPO plans to use electronic media to
deliver monthly or quarterly account statements required under Rule
4.22.91
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\91\ The requirement of a manual signature on such statements
pursuant to Rule 4.22(h) may be satisfied if the CPO keeps a
manually signed copy at its place of business in accordance with
Rule 4.23. See Division of Trading and Markets Interpretative Letter
No. 93-61, [1992-1994 Transfer Binder] Comm. Fut. L. Rep. (CCH)
para. 25,780 (June 24, 1993) (CPO may use facsimile signature
pursuant to Rule 4.22(h) provided CPO retains the Account Statement
from which facsimile is made in accordance with Rule 4.23); cf.
Advisory No. 28-96 [Current Transfer Binder] Comm. Fut. L. Rep.
(CCH) para. 26,711 (May 28, 1996) (use of personal identification
number may be deemed equivalent of manual signature for purposes of
attestation under Commission Rule 1.10(d)(4)), supra note 25.
Commission regulations do not currently permit CPOs to deliver
Annual Reports by electronic means. However, the Commission invites
comment from CPOs, accounting professionals, and other interested
persons regarding the advisability of amending Rule 1.16 to allow
for certification of Annual Reports by independent public
accountants by means of electronic media.
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CTAs and CPOs who intend to make electronic delivery must inform
potential recipients concerning: (1) the requirement that prospective
managed account customers and commodity pool participants receive a
Disclosure Document for the relevant trading program or commodity pool
at or prior to the time of solicitation and such other documents as the
CTA or CPO seeks consent to deliver by electronic media; (2) their
right to elect to receive the Disclosure Document (and other
[[Page 42159]]
specified documents to the extent consent is sought for electronic
delivery of other communications) in hardcopy form or by electronic
means; (3) the specific medium and method by which electronic delivery
will be made (for example, whether delivery will be limited to users of
a particular proprietary on-line system, will be made available on the
World Wide Web, or will be made as an attachment to electronic mail);
(4) the potential costs associated with receiving or accessing
electronically delivered documents, such as costs relating to on-line
access charges, the requirement to maintain an electronic mail account,
or the need to possess certain proprietary software packages (such as a
particular word processing program or operating system); (5) the types
of documents that will be delivered electronically, i.e., documents in
addition to the Disclosure Document, such as supplements to Disclosure
Documents and pool account statements, and the form in which they will
be delivered; and (6) the prospective customers' right to revoke their
consent to electronic delivery at any time and the period of time
during which the consent to electronic delivery will be effective,
absent revocation. Notification concerning at least each of these
factors is necessary to the receipt of informed consent from the
intended recipient. As informed consent must be revocable at any time,
if a person initially agrees to receive certain required disclosures
electronically, he must be permitted to revoke such consent at any
time, and the CTA or CPO must then provide him with disclosures in
hardcopy form. Potential recipients of electronic communication may
provide their informed consent either in writing or by electronic
means.
Delivery and Access. As noted previously, Commission rules require
that at or before the time at which a CTA or CPO solicits a prospective
client or pool participant, respectively, he must deliver, or cause to
be delivered, the applicable Disclosure Document.92 When a person
delivers a document by means of postal mail or provides the document
personally, the recipient simultaneously has notice of the delivery of
the document and receives the actual document. By contrast, when a
person distributes a document by means of electronic media, the
document (a) will be available only to persons who possess the
necessary computer equipment and software to receive it, (b) must be
brought to the intended recipient's attention and (c) will be
accessible only to recipients who take certain actions in order to
access and review the document.
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\92\ As noted by example above, a CPO may not satisfy the
requirements of Rule 4.21(a) by electronically posting a ``term
sheet.'' Rule 4.21(a) provides that ``where the prospective
participant is an accredited investor, as defined in 17 CFR
230.501(a), a notice of intended offering and statement of the terms
of the intended offering may be provided prior to delivery of a
Disclosure Document * * *.'' In posting a term sheet on a public
electronic forum, a CPO is soliciting all persons who are able to
access such term sheet, many of whom may not be ``accredited
investors.'' Consequently, unless a CPO restricts access to its term
sheet to ``accredited investors'' only, a CPO must also provide a
copy of its Disclosure Document in accordance with the criteria set
forth herein in order to comply with the requirements of Rule
4.21(a). In any event, to the extent that the CPO intends the
offering to be an exempt private offering under SEC Regulation D,
such CPO must comply with the solicitation and advertising
restrictions in SEC Rule 502(c). See 60 FR at 53463-64 (in which
example (20) of SEC's release indicates that placing offering
materials on Internet would not be consistent with prohibition
against general solicitation or advertising in Rule 502(c) of
Regulation D).
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The prospective client or pool participant must be provided the
relevant Disclosure Document prior to or at the time of solicitation.
In general, the breadth of the term ``solicitation,'' combined with the
requirement to deliver a Disclosure Document at the time of or prior to
solicitation, significantly restricts the information that CTAs or CPOs
may present about their services prior to delivering a Disclosure
Document. As discussed above, even preliminary contacts or
communication of basic information may constitute a solicitation.
Indeed, a website operated by a CTA who simply identifies himself as
such may operate as a solicitation, even without other content.
Consequently, if for example, a CTA's Disclosure Document is presented
at the end of the CTA's website, or made available only at the option
of the reader, delivery of the Disclosure Document may occur only after
the solicitation has occurred, if at all. In such instances, the CTA
operating the website would be in violation of Commission rules with
respect to delivery of Disclosure Documents prior to or at the time of
solicitation. To facilitate the operation of websites by CTAs and CPOs
in a manner consistent with Commission rules and without unduly
burdening the use of this medium, the Commission provides the following
guidance.
First, a website must provide access to the Disclosure Document
prior to any content other than de minimis introductory material. For
example, a visitor may be given a general description of the contents
of a website before reviewing the Disclosure Document. This may be
accomplished through presentation of an outline or table of contents
for the website, with the Disclosure Document listed as the first item
in the outline or table of contents. The outline or table of contents
may include topic headings that are neutrally stated, such as
``Disclosure Document'', ``Background of CTAs'' and ``How to Contact
Us.'' Icons or images also may accompany such topic headings, but both
the topic headings and any icons or images must be presented neutrally.
The website must be constructed so that the reader may not proceed
to subsequent sections of the site until he has first accessed and
proceeded through the Disclosure Document. Thus, if an outline or table
of contents is used, the only active hyperlink should be to the
Disclosure Document. For example, if a visitor attempts to view another
portion of the website, the website should inform the visitor that he
must first access the Disclosure Document before he will be allowed
elsewhere in the website. Only after a visitor has been delivered a
Disclosure Document and affirmed that he has reviewed it may hyperlinks
to other sections of the website be activated.
Delivery of a Disclosure Document for purposes of solicitation,
i.e., Commission Rules 4.21(a) and 4.31(a), will be complete when the
recipient scrolls down to the end of the Disclosure Document and
confirms that he has received the Document. Many website operators
currently employ similar designs, for example, in requiring persons to
agree to a set of terms and conditions before proceeding in a website
or to acknowledge that they are of a certain age. This confirmation of
delivery is for the purpose of complying with the requirement that the
Disclosure Document be provided at or before the time of solicitation.
This confirmation, which is required in the context of electronic
presentations of solicitation material, is distinct from the receipt of
acknowledgment that is required before a prospective pool participant
or client may open an account pursuant to Rules 4.21(b) and 4.31(b).
The requirements for obtaining a receipt of acknowledgment under Rules
4.21(b) and 4.31(b) are discussed below in the acknowledgment section.
Websites that contain multiple trading programs or commodity pools
may contain a separate Disclosure Document for each such program or
pool. CTAs or CPOs, however, are not required to deliver a Disclosure
Document for every trading program or commodity pool before allowing a
potential client or pool participant access to all portions of a
website. Rather, a CTA or CPO may
[[Page 42160]]
allow a prospective investor to select a particular trading program or
commodity pool, and following delivery of the Disclosure Document for
such program or pool, the prospective investor may access general
information or material specific to such program or pool. CTAs or CPOs
who operate several trading programs or commodity pools must ensure
that there is no solicitation on behalf of programs or pools for which
a Disclosure Document has not been delivered and reviewed. For example,
a CPO who delivers a prospective pool participant a Disclosure Document
for ``Pool A'' must not allow such prospective pool participant to
access materials on his website pertaining to ``Pool B.''
Commission rules require that a CPO or CTA deliver a particular
Disclosure Document only once; consequently, with respect to ``repeat
visitors,'' separate delivery is not required for subsequent
solicitations for the same pool or trading program so long as the
Disclosure Document has not changed or expired. Thus, CTAs and CPOs may
design websites systems that allow ``repeat visitors'' who have already
reviewed a Disclosure Document to bypass the requirement to receive
that Disclosure Document again. For example, a prospective investor,
after receiving the required Disclosure Document(s), may be given a
password or PIN to enter at the beginning of a CTA's or CPO's homepage
to allow him to bypass the consent and Disclosure Document delivery
portions of the website for the trading program(s) or pool(s) for which
he has already recieved a Disclosure Document. However, in order to
comply with Commission Rules 4.26 and 4.36, the password or PIN must
expire once the CPO or CTA amends his Disclosure Document(s) or the
effective period of the Disclosure Documents expires.
Documents can be delivered electronically in a variety of ways;
some of these methods require very little effort on the part of the
recipient, whereas others demand substantial computer expertise or
lengthy download times.93 The Commission believes that delivery
should be made in a manner that is not unduly burdensome to the
recipient of the document. In cases where information is unduly
burdensome to access, the Commission will deem such delivery to be
ineffective unless the party making delivery can demonstrate that the
recipient actually accessed the document. In the case of a Disclosure
Document, an acknowledgment of receipt, provided that it is fully
informed and voluntary, should suffice for this purpose.
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\93\ Certain methods of delivery require relatively little
sophistication on the part of the user. For instance, the content of
a site on the World Wide Web can be accessed simply by entering that
address into a ``web browser'' program. Similarly, the contents of
an electronic mail message are viewed simply by reading the
electronic mail screen or by viewing an attachment to electronic
mail that is formatted for a widely available word processing
program. On the other hand, where a party must download a file and
also a program to decode that file (e.g., ``unzip'' programs), it is
less certain that such party will ultimately be able to access the
document. In raising this concern, the Commission does not
necessarily intend to preclude any particular types of electronic
transfer but, instead, is seeking to ensure that the recipient is
able to access the information communicated without substantial
burden.
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However, electronic media present special concerns with respect to
access because an acknowledgment of receipt in this context does not
evidence the ability to access the document over time. The Commission
believes that the recipient of electronically delivered documents
should be able to have repeated access to the document following
delivery. Such accessibility should be comparable to that of a paper
document that can be read and re-read over time.94 The ability to
re-read a document, such as a Disclosure Document, is often necessary
to a careful evaluation of the risks and benefits of a particular
investment or a meaningful comparison of Disclosure Documents of
different pools or trading programs. Accordingly, in order for the
electronic delivery of Disclosure Documents to satisfy the Commission's
requirements, the recipient must be able to access the document upon
receipt and continually thereafter. If the method of electronic
delivery of a Disclosure Document requires the reader to download a
file to a permanent storage device (such as a hard drive) and to
confirm that he has done so, the accessibility concern may be
addressed. However, in other circumstances, such as where a Disclosure
Document is not downloaded, the Commission believes that accessibility
of the Disclosure Document to the prospective (or actual) CTA client or
commodity pool participant for a period of nine months after the
solicitation occurs would be sufficient but requests comment on this
issue.
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\94\ For example, a ``one-time'' or ``live'' broadcast over the
Internet generally does not allow a recipient repeated access to the
information. In the absence of adequate evidence that the intended
recipient actually recorded or stored the information, this method
of presentation would not satisfy the access concerns identified
above.
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Acknowledgments. The requirement to deliver a Disclosure Document
is only part of a CTA's or CPO's obligation. Before a CTA may enter
into an agreement with a prospective client to direct or guide his
account, or before a CPO may accept or receive funds, securities or
property from a prospective pool participant, such CTA or CPO must
receive a signed and dated acknowledgment from the prospective client
or pool participant confirming receipt of the Disclosure Document for
the trading program or pool, respectively.95 A CPO or CTA may not
rely solely on the fact that a prospective investor may have visited
the Disclosure Document while reviewing a CPO's or CTA's homepage or
consented to receive a Disclosure Document by electronic media.96
The signed and dated acknowledgment is a certification by the
prospective investor that he has received the required Disclosure
Document and is among the items required to be kept by CPOs and CTAs
under the Part 4 recordkeeping requirements.97
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\95\ See Rule 4.31(b) and Rule 4.21(b) for CTAs and CPOs,
respectively.
\96\ As noted previously, the requirement of a signed
acknowledgment of receipt is distinct from that of delivery, i.e.,
an adequate delivery mechanism may be implemented without receipt of
a signed acknowledgment of receipt. In the recent revisions to Part
4, 60 FR 38146 (July 25, 1995), the Commission confirmed the
importance of the requirement that the prospective investor
separately acknowledge receipt of the required Disclosure Document
but commented that ``an acknowledgment may be included in the
subscription documents for a pool, provided that the text of the
acknowledgment is prominently captioned and distinguished from the
subscription agreement and that there is a separate line for the
acknowledgment signature and date thereof.'' 60 FR at 38181.
\97\ See Commission Rules 4.23(a)(3) and 4.33(a)(2),
respectively.
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The Commission supports the use of electronic media to obtain
customer acknowledgments but believes that measures must be taken to
assure an adequate level of verification of the authenticity of such
acknowledgments. Requiring the reader to send an electronic mail
message or click on an ``acknowledgment button'' on a website would
not, without more, be sufficient for this purpose. As discussed above,
the Division of Trading and Markets has permitted the use of a personal
identification number (``PIN'') to represent a manual signature for the
transmission of certain financial reports in which a manual signature
normally is required.98 The use of a PIN serves two important
objectives. First, it enables the recipient, to the extent practicable,
to verify the identity of the person sending the electronic
communication. If an electronic transmission is
[[Page 42161]]
accompanied by a unique and valid PIN, and the recipient knows the
identity of the person who requested and received such PIN, it then may
confirm the identity of the sender of such message. Second, use of PINs
helps to protect innocent persons from false claims that they have sent
a particular electronic communication. If a message is sent by one
person claiming to be another, the failure to include the valid PIN
assigned to such person would render the message invalid. Although the
Commission invites comments from interested parties generally on
methods to assure the validity of electronic acknowledgments, it
believes that a PIN system similar to that used by FCMs for the filing
of financial reports with certain self-regulatory organizations would
provide an acceptable form of obtaining acknowledgments of receipt of
Disclosure Documents. Under Rules 4.21(b) and 4.31(b), CPOs and CTAs
bear the burden of obtaining a valid acknowledgment of receipt from
prospective pool participants and clients; they are thus responsible
for establishing procedures adequate to establish the authenticity of
electronic acknowledgments and to preserve records thereof. Currently,
in light of this concern, if a CTA or CPO wishes to establish a system
for the electronic acknowledgement of receipt of a Disclosure Document,
it must create a procedure by which the prospective client or pool
participant requests and receives by means of electronic or postal mail
an individualized PIN from the CPO or CTA. Once a person receives a
PIN, he may then use that PIN in lieu of a manual signature to
authenticate the acknowledgment of receipt.99 The mechanics of
using a PIN signature are illustrated by example below. The Commission
welcomes comment concerning other procedures for electronic
acknowledgment that are consistent with the objectives stated above.
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\98\ Advisory No. 28-96, [Current Transfer Binder] Comm. Fut. L.
Rep. (CCH) para. 26,711 (May 28, 1996), discussed supra note 25.
\99\ The Commission notes that various states have established
or are developing requirements for ``digital signatures.'' See,
e.g., ``Utah Digital Signature Act,'' Utah Code Ann. 46-3-101 et
seq. (1995). To the extent that a particular state recognizes as
valid only certain digital signatures, it is the responsibility of
the registrant to ensure compliance with such rules in order to
comply with state law requirements.
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Of course, CTAs or CPOs, even those providing a Disclosure Document
by electronic media, are not required to obtain acknowledgments of
receipt electronically. A CTA or CPO may require that the prospective
client or pool participant provide a signed and dated paper
acknowledgment by mail or facsimile, although the acknowledgment form
may be sent to prospective investors by mail, facsimile, or through the
Internet.
Format. The Commission's rules contain a number of specific format
requirements relevant to Disclosure Documents, reflecting the
Commission's determination that certain information should be accorded
special prominence in the Disclosure Document. Parameters for the order
of presentation ensure that certain key information is presented first,
that important disclosures are not minimized or relegated to the end of
the document, and that information of lesser relevance is placed after
matters of greater importance. The prescribed order also facilitates
the comparison of documents by maintaining the same sequence of topics
across documents of different registrants. For example, Rules 4.24,
4.25, 4.34 and 4.35 include specifications as to the placement in
Disclosure Documents of required risk disclosure and cautionary
statements, tables of contents, and supplemental information, as well
as the sequence of various past performance records.100 In
addition, certain items are required to be set forth in capital letters
and bold-face type, certain information is required to be accompanied
by cautionary legends or disclaimers, and in some contexts, page number
cross-references are required.101
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\100\ See Rules 4.24(a) through (d), 4.24(v), 4.25(a)(2) and
(3), 4.34(a) through (d), 4.34(n) and 4.35(a)(2).
\101\ See Rules 4.24 (a) and (b), 4.25 (a)(9) and (c), 4.34 (a)
and (b), 4.35 (a)(8) and (b) and 4.41(b)(1).
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Where Commission rules specify the prominence, location, or other
attributes of the information required to be delivered, any acceptable
electronic presentation of such information used to satisfy Commission
rules must present the information in the same format and order as
specified in Commission rules and must reflect (if it does not actually
replicate) the differences in emphasis and prominence that would exist
in the paper document.102 Further, the addition of any audio,
video or graphic material, whether included as separate sections or as
enhancements or overlays to written text, must be consistent with the
requirements of Commission rules regarding the order of presentation
and the relative prominence of information.103 Such material would
constitute ``supplemental information'' 104 and thus must be
presented in the Disclosure Document in accordance with Rules 4.24(v)
and 4.34(n).105 Such material may not be presented in a manner
that obscures or diminishes the prominence of any required disclosures.
If one version of a document contains audio, video, graphic or other
material that cannot be included in another version, e.g., if the
electronic version of a Disclosure Document has an audio narration,
such material must be reproduced in the medium of the version that does
not actually contain the material.106
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\102\ For example, where text is required to be presented in
bold-face type, acceptable on-screen presentation could be
accomplished by changing the color or shading of the text and/or the
background in a prominent manner. In addition, information such as
the break-even point per unit of initial investment must be
presented in the forepart of the Disclosure Document and the Risk
Disclosure Statement, which must appear immediately following
disclosures required to be on the cover of the Disclosure Document,
must highlight the page (or highlight the link) where the break-even
point is presented. If the document is not paginated, a registrant
may use hyperlinks in lieu of page numbers.
\103\ For example, Rule 4.25(a)(3)(ii) requires that performance
results for pools of a different class from the offered pool be
presented ``less prominently'' than the performance of pools of the
same class. Audio, video or graphic devices may not be used in a
manner that is inconsistent with this requirement. Similarly, an
audio voice-over that asks a prospective client to turn directly to
the CTA's performance tables, bypassing the cautionary and risk
disclosure statements and the forepart information required by Rule
4.34 (a), (b) and (d), is not permitted.
\104\ ``Supplemental information'' refers to ``information not
specifically called for by Commission rules or federal or state
securities laws or regulations.'' 60 FR at 38150.
\105\ Rules 4.24(v) and 4.34(n) specify that supplemental
performance information (not including proprietary, hypothetical,
extracted, pro forma or simulated trading results) must be placed
after all required performance information in the Disclosure
Document and that supplemental non-performance information relating
to a required disclosure may be included with the related required
disclosure. Other supplemental information may be included only
after all required disclosures. 17 CFR 4.24(v) and 4.34(n). Rules
4.24(v) and 4.34(n) also provide that supplemental information may
not be misleading in content or presentation or inconsistent with
the required disclosures and is subject to the antifraud provisions
of the Act and Commission and NFA rules.
\106\ Commission Rules 4.26(d) and 4.36(d) require that a CPO or
CTA, respectively, file a Disclosure Document with the Commission
prior to its use. To the extent that a Disclosure Document contains
any audio, video, or graphic material, the CPO or CTA must file that
version as well as any paper version. CPOs and CTAs who are required
to file a Disclosure Document that contains audio, video, or graphic
portions should contact the Division of Trading and Markets to
establish a method whereby the Commission may receive such
documents.
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Modifications. Commission Rules 4.26 and 4.36 require that
Disclosure Documents be used for no more than nine months and that
performance information included therein be current as of a date not
more than three months prior to the date of the Disclosure Document.
Additionally, if at any time the Disclosure Document becomes materially
inaccurate or incomplete, the registrant must correct the defect and
distribute the correction to, in the case
[[Page 42162]]
of a CPO, all existing pool participants and previously solicited pool
participants prior to accepting or receiving funds from such
prospective participants,107 and in the case of a CTA, all
existing clients in the trading program and each previously solicited
client for the trading program prior to entering into an agreement to
manage such prospective client's account.108 For persons who have
consented to receive such information electronically, registrants may
provide amendments and updates in the same manner, provided that such
recipients' consent to the use of electronic media extends to
amendments and updates.
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\107\ 17 CFR 4.26(c)(1).
\108\ 17 CFR 4.36(c)(1).
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One of the salient features of electronic media is the ability to
modify or update information more simply and more frequently than in a
paper environment. On the Internet, many financial service providers
update their performance on a daily basis, a practical impossibility
using conventional postal mail.109 The Commission believes that
the greater timeliness of information that electronic media is capable
of providing is an important benefit. Certainly, therefore, information
contained in electronic form can be expected to be at least as current
as that in paper form. Consequently, where a registrant employs
electronic and paper media, the electronic version of any publicly
disseminated document must be at least as current as any paper-based
version. If registrants elect to update their performance more
frequently than is required, any such performance history must be
calculated and presented in accordance with Commission rules.
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\109\ Indeed, by the time the recipient received such updated
information, it would already be out of date.
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Record Retention. Another important area of regulatory concern in
the context of electronic media is that of recordkeeping, as provided
by Commission Rules 4.23 and 4.33.110 These rules require that
CPOs and CTAs keep, among other records, ``the original or a copy of
each report, letter, circular, memorandum, publication, writing,
advertisement or other literature or advice (including the texts of
standardized oral presentations and of radio, television, seminar or
similar mass media presentations) distributed or caused to be delivered
* * * showing the first date of distribution or receipt if not
otherwise shown on the document.'' 111 The Commission's Part 4
recordkeeping requirements thus extend to the contents of CTA and CPO
websites and related electronic mail messages. The Commission's rules
concerning the use of electronic media for recordkeeping, e.g., optical
disk or CD-ROM storage, permit storage of computer generated records in
ASCII or EBCDIC format only.112 These formats generally do not
allow storage of paper records or electronic images, such as webpages,
since such records or images are normally not written in ASCII or
EBCDIC format. Therefore, these records would be required to be
retained in hardcopy form. The Commission invites interested parties to
comment concerning whether these rules, and in particular, Rule 1.31,
are sufficient to address record retention in the current electronic
environment.
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\110\ For instance, Rule 4.23(a)(9) provides that a CPO must
keep:
The original or a copy of each report, letter, circular,
memorandum, publication, writing, advertisement or other literature
or advice (including the texts of standardized oral presentations
and of radio, television, seminar or similar mass media
presentations) distributed or caused to be distributed by the
commodity pool operator to any existing or prospective pool
participant or received by the pool operator from any commodity
trading advisor of the pool, showing the first date of distribution
or receipt if not otherwise shown on the document.
Analogous requirements for CTAs are found in Rule 4.33(a)(7).
\111\ Commission Rules 4.23(a)(9) and 4.33(a)(7).
\112\ 17 CFR 1.31(d). See 58 FR 27458, 27462-63 (May 10, 1993).
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The following examples are illustrative of the requirements
discussed above.
(22) (Hyperlink to Disclosure Document From Homepage Satisfies
Delivery Obligation) RST is a CTA who operates a site on the World
Wide Web. RST provides copies of its Disclosure Documents, in an
acceptable format, which visitors to its website can access from a
menu of options at the beginning of its website. Before the visitor
may access data on the website other than the menu or table of
contents, such as a description of RST's principals and summaries of
its trading programs, performance data, or other matters, visitors
must select and view a Disclosure Document for the trading
program(s) in which they are interested. By providing access to each
of these Disclosure Documents and assuring that the visitor has
reviewed the Disclosure Document prior to proceeding, RST has
complied with Rule 4.31(a), which requires that at or before the
time a CTA solicits a prospective client, the CTA deliver to the
prospective client a Disclosure Document for the trading program
pursuant to which the CTA will direct or guide the account.
(23) (Obtaining Informed Consent) GHJ is a CTA with a site on
the World Wide Web. On the first page of GHJ's website, and before
any solicitation materials are presented, is a page requesting
informed consent from visitors to receive GHJ's Disclosure Document
by electronic means. This page informs visitors that: (a)
prospective managed account clients must receive a Disclosure
Document; (b) they can receive the Disclosure Document in hardcopy
if they prefer; (c) the electronic version of the Disclosure
Document will be contained in a portion of GHJ's website; (d)
persons accessing the electronic version of the Disclosure Document
may incur charges relating to on-line access fees; (e) the original
Disclosure Document as well as any amendments thereto will be
provided on the website; and (f) visitors have the right to revoke
their consent to receive electronic delivery at any time. At the
bottom of the webpage is a button for visitors to ``click'' if they
consent to receive electronic delivery of GHJ's Disclosure Document
and any amendments thereto. If a visitor ``clicks'' on the
acknowledgment button, he is hyperlinked to a copy of GHJ's
Disclosure Document. If a visitor ``clicks'' on a button signifying
that he does not provide his consent to receive a Disclosure
Document by electronic means, he is then hyperlinked to a form
asking for his name and postal address, which will be used to send a
hardcopy Disclosure Document through postal mail and is not allowed
to view any other portions of the website. GHJ's website properly
obtains informed consent from visitors. Before engaging in any
solicitation activity, GHJ obtains informed consent to deliver the
Disclosure Document electronically. Then, immediately upon receipt
of such consent, visitors are delivered the Disclosure Document.
Once a visitor scrolls down to the end of the Disclosure Document
and acknowledges that he has received the Disclosure Document, he
may view other data on the site. However, before the visitor may
open a managed account with GHJ, an acknowledgment of receipt of the
Disclosure Document in accordance with Rule 4.31(b) must be
obtained, either electronically (see example 25 below) or in
hardcopy.
(24) (Registrant May Require Acknowledgment to be Returned by
Postal Mail) X, a registered CTA, has established a site on the
World Wide Web. After users review X's Disclosure Document, they may
access other portions of X's website. In the section dealing with
opening an account, users are informed that before a trading account
may be opened with X, a prospective client must download X's
Disclosure Document and return a signed acknowledgment of receipt
thereof. On X's website is a form receipt of acknowledgment, with a
statement informing the user that the acknowledgment must be
printed, and signed, dated and returned to X by postal mail before X
will open an account for the user. Receipt of such an acknowledgment
would comply with Rule 4.31(b). Registrants are permitted to
distribute Disclosure Documents to prospective clients
electronically and may obtain acknowledgments of receipt
electronically. However, they are not required to do so. A CTA
operating a site on the World Wide Web may require that
acknowledgments be signed, dated and returned by postal mail.
(25) (Acknowledgments May Be Signed Electronically With a
Personal Identification Number) LMN, a registered CTA, operates a
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site on the World Wide Web. LMN's website permits prospective
clients to acknowledge receipt of its Disclosure Document by
electronic media. Jill Doe visits LMN's website and wishes to open a
managed futures account. LMN's website instructs Jill Doe that in
order for her to acknowledge receipt of its Disclosure Document, she
must receive a PIN. LMN's website asks Jill Doe to provide her
electronic mail address, to which a PIN may be sent. Upon receipt of
Jill Doe's electronic mail address, LMN then sends her a PIN. Jill
Doe may then use that PIN in lieu of a manual signature required
under Commission Rule 4.31(b).
(26) (Consent To Receive Monthly Statements Electronically Can
Be Withdrawn) JKL is the registered CPO of the Fund. John Smith and
Jane Doe are both participants in the Fund. In September, JKL sends
a notice to participants indicating that it will be sending monthly
account statements to participants via electronic mail through the
Internet, as Microsoft Word documents. JKL informs all pool
participants that persons wishing to receive monthly account
statements by means of electronic mail may incur costs relating to
on-line access time, maintaining an electronic mail account, and
owning a licensed copy of Microsoft Word. Further, JKL informs pool
participants that electronic delivery of the monthly account
statements will begin in January 1997. At the bottom of the notice
is a form for participants to complete if they are interested in
receiving monthly account statements electronically. The form asks
for the participant's electronic mail address and for the
participant's signature agreeing to the conditions of the electronic
delivery.
John Smith and Jane Doe complete the form and mail it back to
JKL in November. In December, John Smith decides that he prefers to
receive monthly account statements by means of postal mail and
notifies JKL that he no longer agrees to electronic delivery. In
January, JKL can send monthly account statements to Jane Doe by
means of electronic mail but must send such statements to John Smith
by means of postal mail. The requirements for manual signatures
under 4.22(h) for these reports will be satisfied if JKL keeps such
signed reports in paper form at its place of business.
(27) (Registrant Must Abide by Parameters of Consent) In the
same example as above, JKL now decides to post its monthly account
statements on its World Wide Web homepage. JKL sends electronic mail
to Jane Doe informing her that the monthly account statement can be
accessed on JKL's homepage on the World Wide Web. This form of
delivery would not satisfy the requirements of Rule 4.22. Jane Doe
has only consented to receive monthly account statements as
Microsoft Word attachments to Internet electronic mail. If JKL
changes its method of electronic delivery, it must again obtain
informed consent from pool participants. Jane Doe's consent to
receive monthly account statements was limited to the means
specified in the September notice. JKL cannot assume that Jane Doe
has access to the World Wide Web or that she will agree to receive
her monthly account statements by viewing them on JKL's homepage.
(28) (Use of Hyperlinks in Table of Contents Acceptable) WXY, a
CPO, posts her Disclosure Document on the World Wide Web. As it
appears on the World Wide Web, the Disclosure Document is without
any ``pages;'' instead it is a continuous stream of HTML text, which
contains all of the required disclosures. In lieu of page numbers as
contemplated by Rule 4.24, WXY has placed in the table of contents a
series of hyperlinks, i.e., subject headings which trigger access to
the various sections of the Disclosure Document. In addition, in the
Risk Disclosure statement, where page numbers are required for the
discussion of expenses, break-even point and principal risk factors,
WXY has provided hyperlinks to those sections. This would comply
with the format requirements of Rule 4.24. Where a Disclosure
Document is posted on the World Wide Web without pages, the CPO may
use readily comprehensible hyperlinks instead of page numbers to
denote specific sections. Both page numbers and hyperlinks allow the
reader to locate a particular section.
(29) (Electronic Version Identical to Paper Version) ABC is a
CTA who operates a homepage on the World Wide Web, with a hyperlink
to enable visitors to download her Disclosure Document. The
Disclosure Document can be downloaded in a form compatible with
Microsoft Word for Windows or WordPerfect for DOS. Once downloaded,
the Disclosure Document is in all respects identical to the paper
version, including page numbers, bold-faced text and capsule
performance information. In this case, ABC has met the format
requirements of Rules 4.34.
(30) (Electronic Version of Disclosure Document May Include More
Recent Performance Data) ABC is a CTA who operates a website. ABC's
hardcopy Disclosure Document is dated August 1 and reflects the
ABC's performance through July 31. It is now October 1, and ABC
wants to amend the performance section of its Disclosure Document
that appears on the website to include performance through September
30. ABC may amend the performance section of the website Disclosure
Document to include more recent performance data. However, the
calculation and presentation of such recent performance data must be
in accordance with Commission rules. ABC is not required to amend
its hardcopy Disclosure Document, which still may reflect ABC's
performance through July 31. Under Rule 4.26, ABC may solicit
prospective clients with the October 1 Disclosure Document and the
version on its website with more recent performance data. However,
on May 1 of the next year (i.e., nine months after date of the
hardcopy Disclosure Document), ABC may no longer use the hardcopy
Disclosure Document. Beginning May 1, ABC must use a new Disclosure
Document. In addition, the Disclosure Document used on the website,
which contains updated performance data, must also be amended to
conform to any other changes reflected in the new hardcopy
Disclosure Document.
(31) (Disclosure Documents Delivered Electronically Must Be
Current and Updated) DEF is a CTA who distributes a hardcopy of its
Disclosure Document and also operates a website with an electronic
version of its Disclosure Document. DEF solicits through its website
but also sends each prospective client a hardcopy of its Disclosure
Document via postal mail. The Disclosure Document DEF sends its
prospective clients has been updated to reflect some material
changes, but the electronic version on the Internet has not. DEF is
in violation of Rule 4.36. Even though DEF provides its prospective
customers with a current version of its Disclosure Document, it may
not solicit customers using a superseded or out-of-date Disclosure
Document.
(32) (Outdated Disclosure Documents May Not Be Used on
Electronic Media) ABC is a CTA who operates a site on the World Wide
Web. ABC's website contains a Disclosure Document that is more than
nine months old. The website also contains a form that allows
persons to request a current version of ABC's Disclosure Document.
ABC is in violation of Rule 4.36. Even though ABC allows prospective
clients to obtain a current version of its Disclosure Document, ABC
may not continue to provide its out-of-date Disclosure Document on
the World Wide Web.
(33) (Outdated Disclosure Document Contained on CD-ROM Cannot Be
Used To Solicit Clients) RST is a CTA who has created a CD-ROM
containing promotional materials and a Disclosure Document. The date
of the Disclosure Document on the CD-ROM is January 15, 1995. On
December 15, 1995, RST provides a prospective client with a copy of
his CD-ROM but at the same time provides the client with a revised
Disclosure Document dated October 1, 1995, which reflects certain
material changes. Even though RST has provided the prospective
client with a revised Disclosure Document, RST is in violation of
Rule 4.36(b) because the CD-ROM contains a Disclosure Document dated
more then nine months prior to its use. After October 15, 1995, RST
may no longer distribute the CD-ROM with the Disclosure Document
dated January 15, 1995.
IV. Electronic Filing With the Commission
A. Pilot Program Commencing October 15, 1996
In response to numerous inquiries from managed futures
professionals, the Commission is evaluating the potential benefits and
costs of electronic document filing, both to registrants and to the
Commission's regulatory program. The Commission is also considering the
relative merits of several alternatives for implementing an electronic
filing system. In furtherance of this objective, the Commission is
announcing a pilot program for optional electronic filing of Disclosure
Documents and is requesting comments concerning the standards and
specifications that should be utilized if the Commission elects to
establish a permanent program for electronic filing.
The Commission has determined to initiate a six-month pilot program
for
[[Page 42164]]
electronic filing of CPO and CTA Disclosure Documents, commencing
October 15, 1996. Participation in the pilot program will be voluntary
and will be open to all registered CPOs and CTAs who are members of
NFA. The pilot program will be conducted by the Commission's Division
of Trading and Markets and will be restricted (at least initially) to
electronic submission of Disclosure Documents (and amendments thereto)
which CTAs and CPOs are required to file with the Commission pursuant
to Rules 4.36 and 4.26, respectively. Electronic filing of other
documents, such as annual reports for commodity pools required to be
filed pursuant to Rule 4.22, and documents filed to obtain relief
available under certain Commission rules, such as notices of
eligibility under Rule 4.5, notices of claims of exemption under Rule
4.7, claims of exemption under Rule 4.12(b) and notices of exemption
under Rule 4.14(a)(8), may be implemented in the future.113
Participation in the pilot program will not obligate a registrant to
provide its Disclosure Documents to prospective clients or pool
participants by electronic means.
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\113\ The Commission is considering electronic filing of the
entire range of documents and reports covered by the Act and
Commission rules, including without limitation, Forms 1-FR for FCMs
and IBs, Form 103 (Large Trader Reporting Form), and Form 40
(Statement of Reporting Trader). As noted in Section I, the
Commission has approved self-regulatory organization (``SRO'')
programs (notably those of the CBT and the CME) permitting FCMs and
IBs to file electronically with such SROs the periodic financial
reports on Form 1-FR required by Commission Rule 1.10. In Advisory
28-96, [Current Transfer Binder] Comm. Fut. L. Rep. (CCH) para.
26,711 (May 28, 1996), the Commission noted its intention to
implement procedures to permit FCMs and IBs that file electronically
with SROs also to file their financial reports electronically with
the Commission.
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Under the pilot program as currently envisioned, a partici-pating
registrant will transmit its Disclosure Document, as an attachment to
electronic mail, to an address specified by the Commission for purposes
of this program. Receipt of the filed document will be acknowledged by
electronic mail, followed by the customary review process conducted by
Commission staff. Electronic mail also may be used by Commission staff
for providing comments on the filed Disclosure Document and by the
registrant to submit document revisions in response to staff comments.
The Commission's pilot program will accommodate use of two widely
utilized commercial word processing systems without the need for
extensive formatting specifications, and it will not require
specialized coding and formatting of numerical tables. At the outset,
Documents filed under the Commission's pilot program will not be made
publicly available in an electronic equivalent of a public reference
room, as is currently the case with the document dissemination function
of the EDGAR system; however, this enhancement may be considered in the
future.114
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\114\ Persons may, of course, obtain hardcopies of Disclosure
Documents filed under the pilot program through a request made under
the Freedom of Information Act, 5 U.S.C. 552 (1994), as implemented
in Part 145 of the Commission rules.
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B. Filing Procedure Under the Pilot Program
The Commission is establishing the following procedures for CTAs
and CPOs seeking to employ electronic filing under the pilot program.
The Commission welcomes comments concerning the adequacy and
appropriateness of these requirements, and suggestions concerning any
additional criteria that the Commission should consider in the pilot
program.
Beginning October 15, 1996, a CPO or CTA may file a Disclosure
Document (or amendment) by taking the following steps:
1. Save the Disclosure Document as a WordPerfect for DOS (version
5.1 or earlier) or a Microsoft Word for Windows (version 6.0 or
earlier) file. Retain both a hardcopy and a diskette or tape backup.
2. Use the participating registrant's NFA identification number as
the file name for the saved Disclosure Document, and add a file
extension (DD1, DD2, DD3, . . . D10, D11, etc.) indicating whether the
submission is sequentially the first, second, etc. submission by the
registrant.115
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\115\ For example, XYZ, whose NFA identification number is
99999999, is a CTA with separate Disclosure Documents for two
trading programs. XYZ names one Disclosure Document ``99999999.DD1''
and the other ``99999999.DD2.'' The first amendment to either
Disclosure Document will be named ``99999999.DD3,'' and each
subsequent submission will follow the same pattern. In the event
that a registrant has more than one version of the Disclosure
Document for a particular trading program or pool offering, each
version would similarly be given a separate file extension.
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3. Add the file as an attachment to an electronic mail message
addressed to [email protected].116 Persons who participate
in the pilot program must agree to receive comments from Commission
staff by electronic mail. Accordingly, the message text should include
the electronic mail address where comments, if any, may be sent.
Confirmation of receipt of
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